To maximize working capital, businesses should pay bills at the last possible moment, improve collections, minimize inventory, and review employee purchases. Working capital management involves coordinating different aspects of the business for success.
When managing working capital, a business should try to pay bills at the last possible moment and improve revenues. A business should also develop an inventory system that doesn’t result in large sums of money being locked up in unused inventory. A company should also pay close attention to the purchases made by employees.
Working capital represents the amount of money that a business needs to use on a regular basis. It is imperative for a business to maximize working capital to be successful. Working capital management involves coordinating different aspects of the business.
One of the first things a business should attempt to do when managing working capital is pay bills at the last possible moment. That doesn’t mean a business should ever engage in late payments; it simply means that the business does not have to pay bills as soon as they are received. By holding bills until maturity, the business can maximize its working capital.
Another key aspect of working capital management is improving collections. Many companies find it difficult to collect money from their customers on a regular basis. Regardless of how much is sold, the business cannot benefit from the sale until the payment is received by the customer. A business might try to change their collection procedures and payment terms with existing customers to improve this area. If a business can simply raise the money it owes, working capital will usually improve significantly.
Inventory is another important part of working capital management. Money dedicated to the purchase of inventory is money that cannot be used for other purposes until the inventory is sold. This means that a business should strive to get by with a minimal amount of inventory at any given time. The company should pay particular attention to the inventory system that is used and try to make it more efficient.
Companies should also pay attention to any purchases they make while managing working capital. Many times, companies allow employees to make purchases on their behalf. When this power is delegated, it allows for errors of judgment. Companies should review each potential purchase to determine if it is completely necessary for the good of the business. If a purchase isn’t necessary for the business to be successful, it shouldn’t be made.
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