The Rule Book To Your Working Capital

Working capital needs to be carefully handled, as it involves both a company’s present assets and its current liabilities. Therefore, it is important to abide by certain rules in order to ensure that there is a good control over the working capital.

Here are certain rules and stepwise procedures to manage “working capital” on a broad scale.

  1. Evaluate all the needs of your working capital based on every cash inflow and every outflow. Identification, sorting, and segregating are the key.

  2. Account for different cash cycles that are appropriate for in your line of business such as managing different customer payments, processing all supplier payments, tallying all the invoice payments, and verification of the outstanding invoice payments.

  3. Verify the financial situations of all the stakeholders involved including the company’s suppliers and customers.

  4. Calculate all invoice payment cycle period, know about the payment terms & conditions, and check if any discounts are available for advance payments.

  5. Manage the company’s inventory, production, and distribution using effective business strategies, for example, apply the concept of Just-in-Time if the approach is suitable for your business or else consider opting for an Economic Order Quantity approach if that is more profitable.

  6. Monitor all the receivables from start to end including every tiny bit of detail, especially while dealing with invoices, where details such as payment terms, due date, and amount are vital and hence must be carefully noted.

  7. Manage all movements of cash from a central point of control, as it will help you manage your funds more effectively and quickly.

  8. Manage all the stocks and inventory to ensure that they perform positively. In cases of non-performing stocks and slow-selling products, be sure to discard them at the very beginning rather than blocking your funds and incurring a loss.

  9. Consider renting, outsourcing, or a different business course of action rather than channelizing a major share of funds in methods that cost the company more.

  10. Protect your company from the varying price fluctuations of the different raw materials available in the market, in order to maintain your profits. Additionally, check within your country and across borders rather than relying on local suppliers.

Thus, it is very important to keep up the performance of your working capital by striking a perfect balance between the needs, amounts receivable, amounts payable, and inventory & asset control. Sticking to the professional know-how’s and expert advice will ensure that you do not go overboard with your working capital but rather lets you stay in control of your working capital. Therefore, minimize the needs of working capital, maximize the income reporting, and optimize all cash flows.