5 Ways to effectively control working capital management

Inventory Management

Inventory management is an, often neglected, but significant aspect of working capital management as cash gets invested in inventory. Excessive inventory blocks capital and creates burden while a shortage of inventory leads to an opportunity lost in sales.

Stock levels need to be monitored closely, be it raw materials or finished products to avoid either extreme. A trigger should be set to re-order items only when it hits the base stock to avoid blocking capital while ensuring businesses run smoothly.

Manage Debtors effectively

Working Capital is significantly improved when sales to cash cycles are maintained as short as possible. Businesses should focus on shortening days sales outstanding period with stronger collection processes to avoid capital being invested in receivables.

Today, several digital solutions allow businesses to transform manual efforts and processes, ranging from invoice creation to payment settlements, into seamless and automated transactions. While technology could help save time and effort, businesses should also aim to gain as much as possible from Discounting & Factoring, that offer quick cash conversion at negligible costs.

Make payments on time

Suppliers’ partnership with businesses is necessary for long term growth. Payment discipline to pay suppliers on time, every time, generates goodwill and earns a reputation that is priceless. Unless absolutely inevitable, businesses should never deviate from paying suppliers on time as it is a short-term measure to control working capital with massive long-term consequences.

Stronger relationships with suppliers help in maintaining better partnerships that lead to higher quality products supplied, on-time delivery and in some cases also larger discounts for bulk buying.

Smart Financing

Good financial planning is a foundation for effective Working Capital management. It is necessary to ensure that a business’s financing involves no funding mismatch – Short term funds for short term requirements, long term funds for long term requirements.

Enterprises could also take advantage of asset-backed financing, which helps in receiving access to capital at more competitive rates of interest than unsecured loans. It is good to compare with lenders to get the best possible rate and loan terms to reduce the interest burden on the balance sheet.

Control costs

Last but not the least, working capital can be improved with effective cost control to make sure that expenses are curtailed only to what is necessary. This requires buy-in from all employees of the company and not just the finance team, to be aware and to bring in disciple within every task undertaken.

When it comes to working capital, every rupee saved earns equal or more dividends. Capitalize on these techniques to benefit from Working Capital and accelerate the growth of your business.