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Optimising Working Capital
Forward Thinking Business Blog –
Business owners can often improve efficiency, profitability and cashflow when they focus on optimising working capital. The first step in getting to grips with working capital is understanding what we mean by the term. ‘Working capital’ captures the value of your company’s current assets minus your current liabilities. Two companies with similarly valued current assets can have very different working capital levels depending on their current liabilities. Similarly, companies with the same level of current liabilities can have different working capital levels depending on their current assets.
The healthier your working capital, the easier it is to pay staff wages and business debts. Companies with strong working capital may also be able to obtain discounts and/or avoid penalties by promptly settling their bills, explains Feargal McCormack.
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Why it is important to optimise working capital
Optimising working capital is important because it improves your business efficiency which, in turn, boosts cashflow and profitability. Factors that can negatively impact working capital include wasteful spending, overstocking merchandise, poor management of labour resources on Work-in-Progress (especially in service businesses) and poorly controlled collection procedures (such as late invoicing or inadequate creditor control).
A strategy as simple as providing telephone training for the person who chases your debts can have a positive impact on working capital and cashflow by helping to ensure that your customers pay on time.
Previously on this blog we covered other strategies that boost working capital, such as:
- Prompt invoicing
- Managing stock and work-in-progress
- Controlling costs
- Managing overheads,
- Reviewing contracts and negotiating better terms with suppliers
- Swapping short-term debt for cheaper long-term debt
Forecasting
Accurate forecasting is another tool that can be extremely helpful. However, it requires access to reliable financial information and not all businesses have the in-house expertise and resources to produce accurate forecasts. Where this is the case, outsourcing can be a cost-effective solution. Real time accounting services provide access to qualified accounting professionals and 24/7 reliable information about your business along with commentary and analysis. This improves decision making and helps make your business more profitable.
FPM organises regular seminars to help clients improve their working capital management. If you would like an invitation to the next event…
