![]() ![]() However, if the company tried to aggressively reduce its inventory turn-over, a large demand shock or a supply shock can lead to the inability to meet its current demand.Īlthough inventory forecasts are not absolutely foolproof, it acts as a good gauge to determine the optimal inventory cycle for each commodity. Lean manufacturing to streamline the process of manufacturing and just-in-time ( JIT) production are techniques to manage inventory. On the other hand, for private companies, credit rating data such as DP credit rating will be useful.Īlthough inventory differs across industries, it is fundamental for every business to manage their inventory. For public companies, publicly available financials such as annual reports will indicate the ability of the company for repayment. The company should instead focus on its clients with the greatest ability to pay first to optimise its receivables. At the very worse, the client might even stop doing businesses with the company. This is particularly true if the company forces its clients to pay when they do not have the capability. Reducing the client’s credit period may jeopardise the good relationship a company has already established between its clients. However, for a company who wishes to prolong their own payment terms, its clients may negotiate similarly. Also, centralising accounts receivable processing helps to maintain common practices and standards while automating processes reduces human entry errors.Īnother viable alternative to reduce the average collection will be reducing the credit period given to its clients. Start getting paid faster by offering discounts to clients to reward their prompt payment. ![]() Below are some of the tips that can shorten the working capital cycle. To improve working capital, most companies aim to shorten their working capital cycle by a faster collection of receivables, minimise inventory cycles and extend payment terms. How to Optimise and Improve Working Capital ![]() While the working capital cycle is subjective to different industries, it is beneficial for companies to compare themselves against their peers in the similar industry. Thus, companies will prefer a shorter working capital cycle to improve their short-term liquidity condition and increase their operational efficiency. In contrast, a longer working capital cycle implies that the capital is locked in the operational cycle without yielding much return. With a shorter working capital cycle, the company is able to free up its cash stuck in working capital. The cycle equates to inventory turnover (in days) plus debtors turnover (in days) minus creditors turnover (in days). By looking at how the company handles these 4 areas on a daily basis, we will be able to determine where is cash being tied up on the balance sheet. The working capital optimisation cycle focuses on 4 areas of a company: cash, receivables, payables, and inventory. This cycle relates to the time a company requires for its net current assets and current liabilities to become cash. Therefore, working capital is one of the primary indications of a well-run company which companies should not neglect. In contrast, a strong working capital allows companies to meet business expenses even in times of financial instability. Without working capital, a company would not be able to sustain its business, much less striving for profitability. Working capital is essential for companies as it is a daily necessity. In this article, we are looking at how to optimise and improve working capital. Working capital measures the company’s operational efficiency and its short-term health. It refers to the difference between a company’s current assets and its current liabilities. ![]() Working capital is the capital a business uses in its daily trading operations. ![]()
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