Working Capital is the fund raised by a company which is used to carry out its daily operations.
WORKING CAPITAL= CURRENT ASSETS – CURRENT LIABILITIES
Working capital also called business capital ensures that the enterprise runs smoothly to meet its short-term debt and manage the daily expenses; hence, working capital management becomes essential.
Managing working capital has always been the key behind strong financial structure of any successful company. Working capital involves various aspects such as inventory management, account receivable and payable and cash.
What is the need for working capital improvement?
Improving the working capital of your company has many benefits as it one of the vital components for the growth of the company.
One must have realized the importance of working capital and the need to improve it by now so let’s try and understand what are some ways a company can improve its capital metrics i.e. working capital?
The basic concept to improve working capital is to increase the current amount of assets and/or to decrease the amount of current liabilities but it is easier said than done. Below are a few ways which might help in attaining this target:
Sources of working capital-
First and foremost one needs to find and mark all the sources from which the business receives its capital and then keep a regular track of it. Continuous efforts must also be made to improve timeliness of the payment and to increase the inflow of cash which will eventually improve the net working capital.
Working capital analysis-
This includes analysing fixed and variable cost and determining whether it can be reduced. A careful examination of working capital will let you find wasteful expenses which can be cut down and all the savings can be added to working capital.
Avoid late penalties-
Companies generally tend to neglect this and end up paying late penalties which affects the working capital and is a wasteful expense. Therefore, it is always advisable to meet debt obligations and use electronic payment methods for automatic payment.
Taking advantage of tax incentives is a very simple way to save money which can then be channelled into working capital funds.
This would make tracking cash inflows and outflows very easy and convenient. A strong collection team can be assigned for following-up delinquent customers this will help in cash flow improvement
Working Capital Enhancement
We at Starters’ CFO have finance experts along with chartered accountants whose expertise along with plans would ensure your working capital improves with time.
Some key points we work on are:
a. Meet debt obligations
b. Manage inventory
c. Examine interest payments
d. Incentivize receivables
e. Choose vendors who offer discounts
An increase in net working capital indicates that the business has either increased current assets that it has increased its receivables or other current assets or has decreased current liabilities.
The net working capital formula is calculated by subtracting the current liabilities from the current assets.
a. Manage procurement and inventory.
b. Pay vendors on time.
c. Improve the receivables process.
d. Manage debtors effectively.
e. Make informed financing decisions.
Working Capital is needed because it is a measure of a company's ability to pay off short-term expenses or debts.
A working capital ratio of less than 1.0 is a strong indicator that there will be liquidity problems in the future, while a ratio in the vicinity of 2.0 is considered to represent good short-term liquidity.
Adequate working capital means an amount of working capital sufficient to meet day to day operation activities of the business concern under normal situations.
a. Define your needs.
b. Formulate a plan.
c. Get your inventory balance right.
d. Keep a tight rein on your costs.
e. Keep on top of your invoices.
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