What Are the Steps of Working Capital Management?
Capital management is so vital to a company’s success that it should be considered a key component in the operation of any business. This is because the capital is responsible for the work of the business, which in turn yields profit. With the help of a sound capital management strategy, companies can reinvest in their businesses and expand their reach without the fear of loss. Working Capital Management is a capital management strategy that allows a company to manage its current resources wisely for better use. Here are the steps of this management strategy.
The first step in working capital management is to negotiate with the suppliers and vendors if a discount deal can be reached. An excellent negotiating skill is required as it leads to savings on inventory. Based on the volume of business and negotiated price, the company’s future cash flows can be forecasted and formatted into an information statement that indicates the length of time it will take for inventory to be sold. It also shows how much risk is involved in holding on to the current stock should it exceed its useful life or market value.
Traditionally, companies used to take credit from suppliers for the items needed in their business. But today, companies have more options for purchasing the products they need. The company can get a line of credit from the bank, allowing them to make purchases without immediately paying. The company can pay the debt over time through deductions made at specified intervals.
This is much better as it gives the company time to use the stock before paying for it. It is better to pay off debts before due dates because the company will be charged with interest charges. Besides, the company will be able to purchase products that are still below their market value.
3. Expansion of Plant and Machinery
A good capital management system involves the expansion of plants and machinery. According to the statement, a company can foresee how much time it will take before improving the plant or machines. To know when expansion is expected, some businesses may consider following up with the government on new plans for their industrial area, which should also contribute to future growth and development. The business needs to know if any further requirements for its industry will increase demand for its products. This, in turn, brings about price increases in their products and high cash inflow into the industry’s business.
4. Excess Inventory
Because a company can benefit from the lower prices it can obtain from its suppliers, it will be wise to hold back on some of its products to make use of them before they are sold. This is called “excess inventory,” and companies can sell them at a later time when prices have risen for their products.
A company can benefit from low prices by holding back on certain items. It will be able to increase profits and longer lines of credit if the market value of these items increases. This is because the company will be able to sell these items at higher prices than when they were purchased, as well as before customers use them up.
5. Aging of Receivables
Another way a company can benefit from excess inventory is by selling them to other companies. This strategy may seem like the company is making less profit. Still, the entire process is a positive way for the company to increase sales of its products without increasing its stock.
All it does is sell excess products it has purchased at lower prices and make more profits through these sales. It also reduces current assets already liquidated in the form of inventory, thus freeing up funds needed to pay other debts and start projects that can bring in even more income.
Working capital management is not a difficult task. Most businesses have benefited from it as they can manage their cash flow more efficiently. Working capital management is also suitable for business because it shows where the company stands with its inventory and gives the company an idea of its supply and demand.
If the current supply exceeds demand, problems may arise that could be easily avoided if sufficient steps are taken to reduce excess inventory. Working capital means everything in a business, from how much profit the company makes to what projects it needs to undertake to expand its business. The working capital of a business will enable it to remain in competition with other companies and increase market demands and needs.