Playing a vital role in the everyday operations of a company, the working capital is one of the most considerable factors owners and accountants pay attention to. Improvements in the working capital can greatly boost a company’s well being in the industry. It includes material procurement, employee salaries and wages, overheads, and funds for operation.
One basic formula on how to improve the working capital position is to collect receivables as early as possible and decrease the outflow of funds for liabilities. Easier said than done, most companies encounter opposite results and run out of funds unexpectedly. A company must closely monitor its cash flow to counteract this. There must be funds allocated for short-term debts, but must not be at the expense of losing the return of investments (ROI) in the company’s assets.
Here are Suggested Ways to Improve Working Capital
Pay Debts on Time
Make sure that debts are followed through and are always paid on time. Make use of electronic payment systems to avoid delays and as much as possible, avoid situations that hinder payments or incur penalties. On-time payments also add up to a good reputation of a company.
Give Incentives to Customers who pay promptly.
Identifying delinquent payers early and coming up with countermeasures to prevent accounts from lingering and aging too much. Avoid business transactions with those who have a history or records of delinquency. Prevention most of the time is better than a cure.
Patronize Vendors Who Offer Discounts
Discounts from vendors will surely help save finances. Companies must also maintain good relationships with them. Relationships like these can help tolerate the situation when a company experiences shortages in funds. Discounts can accumulate into large amounts when computed if viewed as a whole. The company can then appreciate the figure for cash savings greatly.
Examine Interest Payments
A decrease in interest on loans or other forms of fixed debt may enable a company to pay lower amounts every month. A company can check its eligibility to modify interest rates and apply them as soon as possible to earn savings. Early payment completion of loans can help reduce the cost of paying future installments. All of the savings can be added to the working capital and help increase it.
Take Advantage of Tax Incentives
As for other companies, tax liabilities automatically register as a liability. Yet looking at the big picture, there are also tax incentives that can help a company save money. These can then subsequently be an addition to the working capital fund.
Analyze Fixed and Variable Costs
A company must also determine whether fixed or variable costs may be reduced if possible. If examined carefully, wasteful expenses can be identified and eliminated, thus a company can have more liquidity for working capital more than expected.
Establish Automation of Accounts Receivables and Payment Monitoring
Tracking of inflows and outflows of cash will be possible through automation. An effective team of collectors is highly appreciated in chasing delinquent customers. Rewarding staff members who can collect dues effectively also helps. Make sure to fully tract the amount of payment and information of the payee accordingly.
Resolve Disputes with Customers and Vendors
Disputes must be resolved as soon as possible with customers and vendors. If ever a case does go to court, make sure that it is resolved without delay to avoid unnecessary legal expenses that can be incurred. One of the causes of concern for many companies is delays in receivables.
Make use of Updated Financial Information
Maintain records of financial statements and reports up-to-date and calculate quick ratios periodically. A clear record of statements will give a better view of the company’s financial position at all times and will also show areas of improvement.
Identify Other Means of Improving Working Capital
Improve working capital by earning higher profits, taking on more debt, issuing company stocks, and selling assets for cash. However, a company must consider these steps as a last resort. Find other means to improve working capital through research and studies of other companies.
A lot of companies have no choice but to sell their stocks or even take on debt when they have insufficiencies in their working capital. Companies can avoid this if they do constant monitoring of their work capital position. And always find ways to increase it through improved cash flow management and better handling of customers and vendors.
These are only a few suggestions on how to improve a company’s working capital. There are other steps in research and other articles online.