Just as a car needs gas or electricity to run, your business needs working capital to operate smoothly.
Working capital is the money left in your company’s “wallet” after all of its immediate bills are covered. In other words, it is the cash you have at hand to take care of daily expenses like paying employees and buying supplies.
However, managing that financial fuel is not just about having enough of it to keep you going; it’s about using it wisely for sustainable, continuous growth. Having a healthy level of working capital means your business can meet its short-term obligations without breaking a sweat, but without enough of it on hand, you won’t have the financial flexibility necessary to seize emerging business opportunities.
With that in mind, let’s explore some strategies chief financial officers and controllers like yourself can use to effectively manage working capital and steer their organizations toward long-term growth.
Working Capital in Action
Some practical ways to boost your working capital are as follows:
Keep a Close Eye on Receivables
The amounts of money that customers owe your business are like seeds you’ve planted: You want a return as soon as possible, so you should keep a sharp eye on accounts receivable and identify any delays or gaps in your cash flow.
Speeding up the rate at which customers pay their obligations can give your working capital an immediate boost. Consider offering early payment discounts, following up with clients, and adopting an efficient invoicing platform to further accelerate your cash flow.
Learn more in How to Evaluate the Creditworthiness of a Company.
Manage Payables Wisely
On the flip side, managing the money you owe to suppliers — your payables — is just as crucial, so negotiate better payment terms with suppliers and seek out early payment discounts wherever possible. Managing your payables effectively and spreading out your expenses can keep cash with your business for far longer, thus widening your financial safety net.
Keep Inventory in Check
When your stock is gathering dust on warehouse shelves, your working capital is suffering all the same. Overstocking ties up funds that could otherwise be used more productively, and though it’s essential to have enough stock to meet demand, it’s just as important not to tie up unnecessary capital.
Implement inventory management techniques, use demand forecasting tools, and identify slow-moving items to help optimize inventory levels. Work closely with your warehouse management personnel to ensure that you are using the latest inventory management technologies and processes.
Use Technology to Your Advantage
On the subject of technology, adopting a few modern tech tools can be a game-changing move in managing your working capital. Automated invoicing, digital payment systems, and financial management software can streamline processes, reduce errors, and provide real-time insights into your working capital.
Additionally, embracing the latest tech will free up a hefty amount of time while providing you with a clearer picture of your working capital position at any given moment, thus enabling you to inform decision-making processes.
Make Friends With Your Suppliers
Having great suppliers is like having a group of neighbors who are likely to help you out in a pinch. By being friendly and reliable with your suppliers, you might get special deals, like being able to buy more stuff at a lower price.
If you establish a deep enough sense of trust, your suppliers may let you pay later than usual or even let you take products now and pay only when you sell them, which can help you keep more cash in your pocket for other things your business currently needs.
Optimize Pricing Strategies
Revisiting your pricing strategies is another good means of improving your working capital. Analyze market trends, understand customer willingness to pay, and — when necessary — adjust prices to increase revenue without necessarily increasing your back-end costs. Use these strategies wisely, though, as raising prices too much or too often can create friction between you and your customers.
Monitor and Forecast
Working capital isn’t a “set and forget” aspect of business finance. You must always keep a close eye on your working capital so you can anticipate cash flow challenges and take proactive steps to keep your business in the green.
Tools like cash flow forecasts, working capital ratios, and financial dashboards can provide valuable insights. In addition, you should work to create a cash-conservative culture across the organization. Simple actions like turning off unused lights, minimizing material waste, and prudent spending can collectively make a big difference.
Looking Beyond the Short-Term
Managing working capital is a never-ending balancing act that requires constant attention and a proactive approach. For CFOs and controllers, optimizing working capital is not just about keeping the business afloat; it’s about steering it toward sustainable growth, and by implementing these strategies, you can ensure you have enough financial fuel for the day-to-day while leaving enough leeway to explore growth opportunities.
Additional Resources
Top 10 Capital Options for Controllers and CFOs
