How to Manage Working Capital Effectively

Every business requires to have capital in hand so that it can perform the daily business activities. This fund or capital for daily use is known as the working capital. This Working Capital needs to be managed properly as if the working capital is affected, and the business activities could be hampered, which will, in turn, affect the bottom line of the business.

Let us understand more about working capital and how it can be managed to help increase the organisation’s profitability.

What is Working Capital?

As explained earlier, working capital is the amount of und which is required by the business organisation daily to run their business organisation in a smooth fashion. The working capital needs to be managed properly as it can affect the profitability of a business. Proper management of the working capital is a very important factor for investors to choose an organisation to invest in.

One of the simplest ways to understand the current working capital scenario of the company is to find the working capital ratio of the business. The working capital ratio helps an investor to understand how a company is operating and is if the company has an adequate amount of funds to cover all short-term expenses.

By following proper Accounting activities, the management of a business can properly allocate the funds to the various business activities and can also generate profits.

How Can You Manage Working Capital?

Managing the working capital is of huge importance to a business as this has the power to make or break the business. Here are a few tips to be followed to manage the working capital of a business:

1.Keep track of all Inventory and Resources being used.

A business should first take a count of all the resources being used at present by the business. Then it should figure out whether the business activity and be carried out with lesser resources. The management should also take care of how much inventory is being used up and how much is still in production. With careful management of the resources and inventory, the business organisation will be able to save a lot of funds which can be utilized in other more important business activities.

2.Keep track of all your Debtors.

A debtor is a person who owes money to the business. He either could have taken a loan or could have taken the ownership of the product but might not have paid for it. This means that a debtor is a very important revenue source for the business, and a business should keep track of the debtor.

First of all, a business should recognise all its debtors and should also provide them with an adequate amount of tie to pay back the amount, but this time should not be very long as it can affect the profitability of the company.

3.Make timely payments to all the Vendors.

One of the ways to develop a relationship with the vendors is to make payments to the vendors on time. The companies which develop strong relationships with their vendors are in a position to achieve and negotiate better deals. They may also negotiate on product discounts and the rate of the products. This can save a lot of money for the business and will also create better relations with the vendors.

4.Have a good Collection System in place

A company should focus on making the receivables period short. To handle this situation, the business should send out invoices to the respective parties as soon as possible. This will give the clients greater time to arrange for funds to pay back the business.

The business organisations can also look into using the help of technology to speed up their collection and delivery of invoices.

5.Make Informed Financial Decisions

Giving priority to the working capital instead of taking up loans of any other kind of debt will help the business to increase efficiency and will also allow the business to make strategic investment decisions. It is established that working capital is the fastest and cheapest source of cash for the company as no interest is attached to it. This will affect the profitability of the business organisation.

If a business follows the above mentioned five tips, they are sure to manage their working capital. There are many more tips that can be followed by a business to effectively manage the working capital, but the best possible solution will be to utilise the services of a professional firm to manage the working capital of the business.

If you want to know more about the working capital of your business and also want to manage it so that the company gains more profit, then JAXA Chartered Accountants can help you with this matter. The experts at JAXA will understand every aspect of your business and accordingly devise a solution.

JAXA Chartered Accountants are the approved auditors for a number of free zones and provide various other services that will help increase the business’s profitability in a hassle-free manner. For more details, Contact Us. We will be happy to help you.