Working capital management is often misunderstood. It is not a task that takes place once, or even once in a while. It needs to be a continuous process that is closely managed to maintain the financial health of your company.

What is working capital? Your business’ working capital is the funds it has immediately available to cover day-to-day business expenses. Assessing the state of working capital can be done by pulling out your business’ balance sheet. Working capital is also used by investors to assess your business’ financial health and liquidity (how easily assets can be sold to generate cash on hand). Working capital can be found by subtracting your business’ current liabilities from its current assets.

Working Capital Optimization Cycle

Your business’ working capital cycle reveals how much working capital it really takes to run your business. This is determined by analyzing the three, key aspects of the working capital optimization cycle: payables, receivables and inventory:

  • Accounts Payable – Payables show how long it will take for your business to pay vendors. Procurement is where it all starts. The terms your business sets and the relationships maintained have a downstream effect on payables balances. It’s also important to analyze the payment process. Improving inaccurate pairing of POs with invoices, examining early payment discounts and optimizing interest paid can greatly improve accounts payable.
  • Accounts Receivable – Receivables show how many days it takes for your business to be paid. Accounts receivable involves orders, invoicing, collections and account management. The efficiency (or lack thereof) in processing orders, timely deliveries, and minimization of returns/damages all impact accounts receivable. Invoices should be sent immediately post delivery of the goods, and clear collection strategies should be followed. In addition, the account management process should never be a one-time occurrence; gauging the credit worthiness of clients must be a continuous process.
  • Inventory – Inventory shows just how long it takes for your business to turn over inventory. In recent years, more and more emphasis has been placed on inventory planning. The goal is to minimize inventory to avoid bloating working capital, while also maintaining enough inventory to not damage revenue and reputation.

Understanding the working capital cycle allows you to make more money by paying down debt and investing funds faster. It will improve your business’ rate of return on cash, rather than that cash being tied up in the working capital cycle. Ultimately, the goal is to ensure your business maintains sufficient working capital for daily operations.

Is your business currently in need of working capital? Sometimes it is necessary for a business to look outside for quick solutions. However, banks are not always willing to offer their funds. Some business types and industries are “too risky” in their eyes, so they turn them away. Thus, many business owners turn to alternative lenders like First American Merchant. As a high-risk specialist, FAM offers quick working capital solutions through flexible programs that are tailored to meet the needs of each business and industry it works with. These solutions offer the capital your business needs to grow, expand and seize opportunities.

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