Working capital is the finance used to maintain the everyday trading operations, like payment of salaries, payment of suppliers and other financial transactions required to keep a company afloat. It’s the difference between assets at the current time and a company’s liabilities. The more working capital available, the better the financial health of a company.
Sources of working capital
There are various sources of working capital, including funding by stockholders, capital assets that have been sold, loans and net income. If a company has excess working capital, it’s in a position to take advantage of opportunities, get better trading terms from its suppliers and could even make a difference on whether it is given a bank loan or not. A lack of working capital could eventually lead to a business not being able to meet its financial obligations, ultimately leading to financial disaster.
How working capital can be improved
Initially, close monitoring by a knowledgeable person or team, like outsourced management accountants, will benefit the company greatly. A plan of action may be required to improve working capital. Although the main focus will probably be on improving credit control and collection of debts, a business can improve financial matters by working on its inventory. It is vital that a company has sufficient stock to meet the demands of customers, but it may have mostly clients that order irregularly or buy in small amounts, leading to surplus stock, which costs the company money. A business may also be stocking the wrong type of products, leading to an excess on hand. This not only depletes working capital, but also inflates warehouse and transportation costs.
A surplus of stock, or holding stock that becomes obsolete, will also deplete funds. Concentrate on a strategy to sell off all surplus stock so that the company claws back some of the initial investment and builds working capital to a reasonable level.
It’s crucial when reviewing inventory that sufficient stock is kept to satisfy demand, while not having too much excess stock that ties up valuable investment funds.
Improving credit control
Improving collection of invoices and shortening the time it takes for customers to pay will significantly improve the company’s working capital. Reduce the number of days given for customers to pay and introduce a penalty for those who pay late.
Management of working capital can have a massive influence on the success of the business. If you would like some advice on this topic, please call us to arrange a chat.