To manage working capital, companies should delay invoice payments, improve collections, minimize inventory, and review employee purchases. Maximizing working capital is critical for business success.
When managing working capital, a company should try to pay invoices at the last possible moment and improve collections. A company must also develop an inventory system that does not result in large amounts of money being tied up in unused inventory. A company must also pay close attention to the purchases that employees make.
Working capital represents the amount of money that a company has to use regularly. It is critical for a business to maximize working capital to be successful. Managing working capital involves coordinating several different aspects of the business.
One of the first things a company should try to do when managing working capital is to pay invoices at the last possible moment. This does not mean that a business should commit to late payments; it simply means that the business does not have to pay invoices as soon as they are received. By holding onto invoices until due, the business can maximize its working capital.
Another key aspect of working capital management is collection enhancement. Many businesses have trouble collecting money from their customers on a regular basis. Regardless of how much is sold, the business cannot profit from the sale until payment is collected by the customer. A business could try changing billing procedures and payment terms with existing customers to improve this area. If a company can simply collect the money owed, working capital will usually improve significantly.
Inventory is another important part of working capital management. Money that goes into buying inventory is money that cannot be used for any other purpose until the inventory is sold. This means that a company must strive to survive with a minimum amount of inventory at any given time. The company must pay special attention to the inventory system that is being used and try to make it more efficient.
Companies should also pay attention to any purchases made when managing working capital. Many times, companies allow employees to make purchases on their behalf. When this power is delegated, it leaves room for errors in judgment. Companies must review each potential purchase to determine if it is completely necessary for the good of the company. If a purchase is not required for the business to be successful, it should not be done.
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