How can businesses with high debt levels optimize working capital?

1 Reduce inventory levels

One way to optimize working capital is to reduce inventory levels, as inventory ties up cash and incurs storage and maintenance costs. Businesses with high debt levels can use various techniques to reduce inventory levels, such as just-in-time (JIT) ordering, demand forecasting, inventory turnover analysis, and supplier negotiation. By reducing inventory levels, businesses can free up cash, lower expenses, and improve their working capital ratio.

2 Improve accounts receivable management

Another way to optimize working capital is to improve accounts receivable management, as accounts receivable represent money owed by customers and affect cash flow. Businesses with high debt levels can use various techniques to improve accounts receivable management, such as invoicing promptly, offering discounts for early payment, enforcing credit policies, and using factoring or invoice financing. By improving accounts receivable management, businesses can accelerate cash inflow, reduce bad debts, and enhance their liquidity.

3 Negotiate better terms with suppliers

A third way to optimize working capital is to negotiate better terms with suppliers , as accounts payable represent money owed to suppliers and affect cash outflow. Businesses with high debt levels can use various techniques to negotiate better terms with suppliers, such as extending payment periods, requesting discounts for bulk orders, consolidating suppliers, and leveraging relationships. By negotiating better terms with suppliers, businesses can defer cash outflow, lower costs, and increase their trade credit.

4 Refinance or consolidate debt

A fourth way to optimize working capital is to refinance or consolidate debt, as debt affects the cost and availability of capital and the solvency of the business. Businesses with high debt levels can use various techniques to refinance or consolidate debt, such as seeking lower interest rates, longer repayment periods, or more flexible covenants, or combining multiple debts into one loan with better terms. By refinancing or consolidating debt, businesses can reduce interest expenses, improve cash flow, and ease their debt burden.

5 Implement working capital analytics

A fifth way to optimize working capital is to implement working capital analytics, as analytics can help businesses monitor, measure, and improve their working capital performance. Businesses with high debt levels can use various tools and methods to implement working capital analytics, such as dashboards, key performance indicators (KPIs), benchmarks, and scenario analysis. By implementing working capital analytics, businesses can identify working capital gaps, opportunities, and risks, and make informed decisions to optimize their working capital.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?