Managing your working capital

Managing your working capital


Working capital is the money needed for day-to-day business operations and is often a measure of a business’s liquidity, efficiency and financial health.

To ensure your business has adequate working capital, the working capital cycle should be applied. The working capital cycle is the length of time from the purchase of inventory to the receipt of cash from customer sales.

The cycle comprises four elements: cash (funds available), creditors (accounts payable), inventory (stock on hand), and debtors (accounts receivable). Maintaining good cash flow requires control over each component. Ways to improve working capital:

Invoicing
To collect payments from debtors early, consider:
– establishing a credit policy
– invoicing early
– reducing payment terms
– stop supplying credit to debtors that do not pay
– following up on overdue accounts
– offering early settlement discounts

Inventory
Inventory can tie up a large sum of your working capital; reducing inventory through the just-in-time model can increase efficiency and eliminate waste. The just-in-time inventory model is beneficial as it allows for quick changes to customer needs and frees up working capital to better meet financial obligations.

Managing cash outflows
Managing the money you owe to creditors is just as important as managing your accounts receivable.

To ensure your cash outflow meets your obligations:
– consider early payment discounts
– prioritise suppliers
– ensure the accuracy of invoices before making a payment
– only make payments when they are due

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If you believe the matters discussed above are relevant to your business, please contact Darren Smith of our office to discuss further.


Darren is a Chartered Accountant with extensive experience, including working in the big 4 and medium sized firms before becoming a partner of a city based firm in 2000.

He has gained much experience and has extensive knowledge in providing business and taxation advice, superannuation planning, negotiation of sales and acquisitions of businesses and property development. His client base covers a wide range of industry groups.

Darren works with business owners to grow their businesses and create personal wealth within and outside of their business.


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