When managing working capital, a company should attempt to pay bills at the last possible moment and improve collections. A company should also develop an inventory system that does not result in large amounts of money being tied up in unused inventory. A business should also pay close attention to purchases that are made by employees.
Working capital represents the amount of money that a business has to use on a regular basis. It is critical for a business to maximize working capital in order to be successful. Managing working capital involves coordinating several different aspects of the business.
One of the first things that a business should attempt to do when managing working capital is to pay bills at the last possible moment. This does not mean that a business should ever engage in making late payments; it simply means that the business should not pay bills as soon as they are received. By holding onto the bills until they are due, the business can maximize its working capital.
Another key aspect of managing working capital is improving collections. Many businesses have trouble collecting money from their clients on a regular basis. Regardless of how much is sold, the business cannot benefit from the sale until the payment is collected from the customer. A business might try changing collection procedures and payment terms with existing customers in order to improve this area. If a business can simply collect the money that is owed, working capital will usually improve significantly.
Inventory is another important part of working capital management. Money that is devoted to purchasing inventory is money that cannot be used for any other purpose until the inventory is sold. This means that a business should strive to get by with a minimum amount of inventory at any given time. The business should pay special attention to the inventory system that is being utilized and try to make it more efficient.
Businesses should also pay attention to any purchases that are made when managing working capital. Many times, businesses allow employees to make purchases on their behalf. When this power is delegated, it leaves room for mistakes to be made in judgment. Businesses should go over every potential purchase in order to determine if it is completely necessary for the good of the company. If a purchase is not required for the company to be successful, it should not be made.