Effective management of working capital is an important business rule regardless of the business stage. The life cycle you have reached. During the start-up or growth phase, many companies are growing rapidly, losing cash and failing. They simply can't keep up with the pace of the business. Increase cash demand. Mature companies must also pay close attention to cash flow and maintain sufficient working capital to pay for suppliers and their due expenses.
In my experience, business owners often overlook two basic issues when addressing their working capital needs. First, how much they need, and second, how they will finance or fund it. Determining your business ' The "cash conversion cycle" is often a good indicator of your working capital needs. It is determined by calculating the speed at which your business converts its purchases [materials, inventory, etc.] into cash received from customer sales.
Effective management of working capital
You can use other working capital ratios or metrics to review working capital needs. The ratio of inventory turnover, creditor days and debtor days can be used to help identify potential problems or trends. Regular review will help you prevent excess liquidity and cash flow and allow you to take positive action, which is too late.
Using "better business practices" will help you manage the debtor's cash income [also known as "accounts receivable"]. Providing a simple payment method, developing and complying with credit policies, and following up on delayed payments will help. However, you need to consider the negative impact these may have on your customers. For example, if your credit terms are bad for them, customers may go somewhere.
It is equally important to pay close attention to payment providers and fees ["accounts payable"]. Pay invoices at maturity [instead of advance payment]; checking the accuracy of invoices, negotiating credit terms, and using any instant payment discounts will help. Remember, in doing so, you need to make sure that the vendor continues to provide you with materials, utilities, and more.
Economic order quantity
For many companies, an important area of good working capital management is managing inventory. Determining the optimal inventory level and the ideal time to reorder the inventory will help to reserve cash. The Economic Order Quantity [EOQ] calculation will help you determine the amount of inventory you need. It will help you balance the "cost of ownership" [storage space, etc.] associated with the order inventory ["delivery costs, etc."]. EOQ will also help prevent you from running out of inventory by determining the "safety level". "
Whether your business is a start-up or not, managing your working capital effectively is critical to your success.
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