How to manage working capital

To ensure a business is operating at its optimum efficiency, it’s vital that current assets and liabilities are managed correctly. This can be done in a number of ways:

Management information

Developing appropriate management information to manage cash flow and production.

Debtor management

Having a good credit control function:

Set appropriate terms and conditions of trade
Set credit limits and apply these (making customer aware)
Apply due dates and chase customers
Apply a commercial / sensible approach to breaches – work with the customer to make settlement
Enforce legal position if necessary

Debtor funding

Consider use of invoice discounting or factoring
Dependent upon debtor cycle (average payment terms)
Weigh up costs vs cash flow benefit (consider alternative non debtor related funding)

Stock management

Stocking policy (raw materials)

Have a stock recording system and keep updated
Set and keep to realistic stock levels (comes back to understanding the supply and production cycle)
Balance out cost of holding stocks vs running short
Agree minimum quantity levels internally and where possible with suppliers of key components / materials

Stocking policy (finished goods)

Have a stock recording system and keep updated
Understand sales and production cycles where possible
Review slow moving stocks and consider selling at a discount to generate funds

Supplier arrangements

Seeking advantageous payment terms (consider the costs, price and relative effect on cash flow) and agreeing supply timescales from ordering to delivery as well as stock holding for call off where possible.