In a small business; cash is king, as availability of sufficient cash determines if a business is running efficiently or not and it plays critical role in maintaining a company’s competitiveness and in fueling its growth.
Running out of cash can cause a company significant distress and even bankruptcy at the worst but on the other hand leaving too much cash on the table and not investing or utilising it towards business’s growth is loss of opportunity. Hence, it is important for a business to have appropriate managerial accounting strategy to ensure efficient levels of both current assets and current liabilities are maintained so that the business has sufficient cash-flow at all times in order to meet its operating expenses and any short-term debt obligations.
Above can be accomplished by optimisation of working capital which can be achieved by,
- Collecting Receivables Faster
- Reducing Inventory Cycles
- Extending Payment Terms
Practically, it is easy to plan working capital strategy but if not undertaken correctly, it can lead to increased supply chain costs as a result of higher shipment costs, loss of bulk discounts from suppliers and higher discount demands from customers.
So, in order to optimise a company’s working capital efficiently, the following steps can be undertaken
Receivables Collection
- Keep an eye on slow paying customers and follow them for delayed payments
- Identify cash rich customers and offer them initiatives for early payments, use data from credit rating agencies and in case of public companies use publicly available financials
Inventory Cycles
- Workout the optimal inventory cycle for each product by comparing logistics costs versus inventory holding costs and potential loss from stock-outs
- Adapt demand and supply procurement principle to ensure your business is never under-stocked or over- stocked; demand can be worked out by looking at historical trends, market conditions and future expectations.
Payment Terms Extension
- Find out which supplier can afford payment extensions in the sense that a late payment from your business will not impact them negatively and negotiate extended payments terms with these suppliers
In Summary, Businesses must create a cash management culture. It involves managing cash flows in an effort to free up cash in both good and more difficult economic times which can ultimately lead to greater profitability, improved balance sheet and most importantly gain of control and flexibility which will give your business competitive advantage.
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