9 Working Capital Management Tips You Need
Regardless of the actual industry that you are working in, working capital will always be a highly important factor that will help you assess the financial health of your particular company. Of course, the idea of a working capital in e-commerce businesses is a bit different than it was in the traditional ones, but the truth is that things have remained the same on the important levels. Basically, while you, as an e-commerce business owner, might be facing some unique working capital management challenges, the truth is that you will certainly be able to manage it successfully if you first learn how to do that and, of course, if you take some time to choose the tools and the services that can help you in that process.
I am, however, not going to talk about those tools today, as I am sure that you’re quite aware of their existence and that you are ready to use at least a couple of them if they show that they can bring great value to the table. Anyway, what we are going to focus on today is this. Basically, we are going to help you learn how to keep your cash conversion cycle fast and how to manage your working capital successfully and effortlessly. Well, okay, the term “effortlessly” might not be completely right here, since you’ll definitely have to put quite some effort into this, but the point is that things will get easier if when you get the tips you need and start using them to your advantage.
What Is Working Capital Management?
If you were expecting me to jump right towards those tips, then let me tell you right away that your expectations were wrong. After all, how can we start talking about the proper ways of doing this if you don’t even know what working capital management entails in the first place? I suppose you see why that wouldn’t be quite a wise move and why we are, instead, going to begin by answering the question of what this concept actually is before we go any further. It is the logical thing to do, as I’m sure you understand.
So, in the simplest words possible, working capital management is a strategy designed to make sure that a particular company is operating effectively through the process of monitoring and assessing all the current assets and liabilities. This might sound complicated when put like that, but it is basically the process of ensuring that you’re using your assets the right way and that you’re also handling your liabilities properly. The definition cannot get an simpler than that, so I’m sure you get what this actually means.
Why Is It Important?
Since you’ve understood precisely what working capital management is, you might have thought that it is time to proceed towards checking out those managing tips that I have previously mentioned. Well, there is nothing wrong with that assumption, but the simple fact is that there is still one more thing we need to address before going forward and before checking out those tips. In plain words, some people are still not entirely sure why working capital management is important, and it is time to help them understand that once and for all.
This definition can further help you understand the concept and thus realize its importance as well: https://www.investopedia.com/terms/w/workingcapitalmanagement.asp
If you’re looking for the short answer, let me put things this way. This specific management process leads to positive working capital. And, if you don’t understand what the benefits of a positive working capital are, then you will need to hear the longer answer, which will definitely help you understand exactly why the management process we are referring to here is so important. The good thing is that there are quite a lot of benefits you can expect from achieving positive working capital, and you’re now going to hear about some of those.
First things first, this will lead to increased liquidity, and I assume you understand the importance of that. With the proper cash levels available at all times, you’ll be ready for any opportunities that might come up, as well as for any unexpected scenarios that might occur, even those unfavorable ones. A great liquidity also allows you to fulfill your customers’ orders more quickly, as well as to invest in some new products and services that you might want to start offering.
If you use your working capital the right way, you will be ready for, or successfully avoid, any future hindrances that might deal a blow to your company. You’ll also have a sort of a safety net in place which will keep you afloat and operational even if there are some delays in receiving your future payments, or if there is a lack of production. There’s no doubt in my mind that you get the importance of this safety net.
Another significant benefit that we absolutely need to mention here is the overall increase in your profits. Every company strives towards maximizing their profits and proper working capital management can definitely help you do that. If both your Accounts Payable and Accounts Receivable are operating efficiently, you are bound to experience an increase in your profits, which opens up a lot of opportunities when word goes of growing your business. Now that you’re aware of the importance of this concept, it’s time to get those tips that we’ve talked about, including those you can see on this website.
Working Capital Management Tips
While most business owners are perfectly aware of the significance of positive working capital, chances are that not all of the know how to properly manage it. There is nothing unusual about this, especially for those company owners that have just recently joined the business world and that are still trying to figure things out. Of course, this is one of those things that you need to figure out as soon as possible, because you certainly don’t want to struggle with growing your firm, and you are bound to struggle without proper management.
That is precisely why I have decided to share some tips that will help you manage your working capital the right way. Once you go through those tips and once you start using them in your business operations, you’ll see quite an improvement in your cash flow as well as an increase in your profits, as explained above. Since those sound like some amazing goals, I’m sure you’re eager to hear the tips, so let us check them out now.
- Manage Your Inventory The Right Way
Your inventory could actually be your most powerful weapon when it comes to managing and improving your working capital. That is why you need to do your best to manage inventory the right way, which means that you should reduce slow-moving inventory, avoid stockpiling, as well as increase the turnover cycles. You might now say that inventory is actually considered an asset and I won’t argue against that since it is definitely correct, but there’s one simple thing you need to be aware of. Less inventory means more freed up cash, which is perfectly logical.
- Pay Vendors On Time
If your plan is to simply do your best to always receive the necessary payments on time while not worrying too much about the payments you need to make, let me tell you right now that this is a wrong way of doing business and that it can lead to a lot of issues with your working capital, contrary to what you might believe. What does this exactly mean, though? Well, to put it as straightforwardly as possible, you need to pay your vendors on time if you want to manage everything perfectly and achieve the positive capital that you’re after.
- Successfully Manage Your Debtors
Of course, that certainly doesn’t mean that you shouldn’t worry about your debtors. I’ve mentioned above that you might be striving to receiving all the payments on time and if that’s what you are doing, then you should keep up the good work. There is absolutely no doubt that this will influence your cash flow, so make sure not to ignore the necessity of getting paid for your products and services, and do your best to successfully manage all your debtors.
- Use Electronic Payables & Receivables
Now, here is a highly concrete tip that you can definitely use to your advantage today. If you want to shorten the receivables period, you’ll need to have a great collection system in place, meaning that you should send out invoices as soon as possible, among other things. Certain inefficiencies in the invoicing process can definitely lead to delays, and delays are never in your best interest. That is why you might want to automate this process as much as possible and start using electronic payables and receivables, which will help you eliminate any errors that might lead to delays. Tools like these can certainly come quite in handy, so make sure to start using them.
- Get Proper Accounting Software
Speaking of tools, there is another thing that can help you manage your company’s cash flow efficiently and successfully. Basically, if you still haven’t found the right accounting software to rely on, I would advise you to do that as soon as possible, since it can be of great help to your business. A great thing about these software pieces is that they are often quite easy to use and understand, meaning that you won’t have a difficult time getting used to the new tool that you’ll bring into the company. Just remember to do your research before choosing one of these software solutions, because you want to get the absolutely best one for you.
- Take Some Bookkeeping Courses If Necessary
If you’re not quite sure what bookkeeping is all about and how it has to be handled, and if you’re motivated to learn, it wouldn’t be a bad move for you to take some courses that can get you acquainted with the topic and basically teach you everything you need to know. Gaining these skills will certainly be of quite some help, but I am guessing that not all of you have the time to do it. After all, you have a business to run and even though bookkeeping is important in that endeavor, it is not a skill that you want to master. That’s perfectly fine, and here’s why.
- Or, You Know, Hire Pros To Do This For You
Not wanting to go through those bookkeeping courses is fine because you can always hire professionals to handle the books on your behalf. In fact, I would definitely advise you to always hire professionals to do this for you, because there is no way that a short course will help you gain all the skills that these experts will definitely have. Plus, since you want to focus on some other important parts of your business, hiring experts to do this for you is the right thing to do and it will undeniably influence your working capital positively.
- Have A Separate Business Account
This should definitely go without saying, but I suppose that there is no harm in mentioning it anyway. In short, you should have a separate business account, as that will help you manage and keep track of all your business transactions and finances without having to wonder whether some of those transactions might be personal and not company-related. Keeping your finances separate is bound to help you operate successfully, which is certainly what you want.
- And Always Be Cautious With Your Budget
Now, if you really want to achieve a positive working capital and make sure that your cash flow is amazing, then you will undeniably need to think about how you are spending your company money. Impulsive spending should never be an option, and making smart financial decisions is a must, since you definitely need to be careful with your budget. Of course, you should also keep unbudgeted expenditures in mind. If you’re not sure that you can handle your budget the smart way, working with financial experts is always an option, and it is a darn good one.