What is Working Capital?
Technically speaking, Working Capital = Your Current Assets – Your Current Liabilities. This means that working capital is the liquid money or asset you have that can be used for immediate payments, whether planned or unexpected.
Factors Impacting Working Capital
Following are the factors that determine the amount of working capital that a business entity requires:
- Nature and size of business
- Business Cycle
- Production Cycle
- Seasonal fluctuations
- Operational efficiency
What is Working Capital Maximization?
Business veterans will often warn you to manage your working capital well, as lack of supervision and control can cause shortage of funds to:
• Continue business operations in the regular manner
• Meet short-term debt
• Meet operational expenses
Here are 5 easy ways to maximize your working capital:
• Get Paid On Time: Your business needs cash and unless you get your payments on time, availability of funds will always be a sore point. Make sure that you maintain an accurate debtors ledger so that you are on top of debtors collection dates, and can send timely reminders to your clients on invoice payments. Here’s a very effective guide on How To Get Paid On Time that teaches you how best to manage your invoices.
• Enforce A Payment Policy: This is easier said than done, especially if your business is new and still small. However, this shouldn’t stop you from negotiating on a payment date for your creditors and communicating the same to them. A fixed payment date helps in many ways – first, the payment schedule helps you to arrange for funds on time and not before (thereby wasting working capital) and not after (to save you from defaulting). Further, your business does not have to take calls from your creditors at frequent intervals, thereby saving your precious time and resources.
• Refer To Your Cash Flow Statement Regularly: If you are using an accounting software like QuickBooks india, generating a Cash-Flow Statement will be instant. In case you keep your accounts manually or in an excel sheet, make sure that you draw up the Cash-Flow Statement once every week or maximum 10 days (depending on your scale of operations) in order to understand clearly the sources from where cash is expected to come for a certain period and your payment liabilities.
• Rein In Your Inventory: Prudent inventory management is an important factor in making the most of your working capital. Identify slow-moving items of stock and buy the minimum possible to meet customer demand. For the fast-moving items, calculate the Economic Order Quantity (EOQ) such that funds don’t stay tied up in stock for undue periods of time.
• Review Your Cash Policies Periodically: You know it better than anybody else that business environment and conditions change. Make sure that you build in both external and internal changes in your reporting tools. Further, periodically review the changes and the resulting impacts and draw new policies basis the change. This will help you get more control in your working capital management, thereby maximizing it as and when necessary.
Here is an infographic that explains the factors that help in determining the amount of working capital that a business entity requires.