Working capital is the lifeblood of any business in Singapore. It enables a company to continue with its daily operations, and this implies that insufficient working capital could result in disruptions in the firm operations. Therefore, giving working capital the right attention is an integral part of running a business successfully.
Components of working capital
Working capital = Receivables + Inventory – Payables
Accounts receivables (Also see Accounting: Managing Accounts Receivable Could Save Your Business) are the cash receipts that are due from customers. Inventory is the current assets such as raw materials, goods for resale, spares parts and more on the business balance sheet. Lastly, accounts payables represent what your company owes to its vendors for services and goods received on credit.
From the method of calculating working capital, it is clear that inventory and receivables increase the working capital while accounts payables decrease it.
What causes an increase in working capital requirements?
Each of the components of working capital needs to be managed, and you need to be sure that the actions you take will not result in negative impact on your working capital. Here are reasons that can make your business working capital requirements to increase.
Reasons related to accounts receivables
Improper credit granting: if you lack a sound criterion to determine the customer creditworthiness, you will be selling goods and services on credit to clients who may not pay. If not checked, this could result to zero receivables (Also see Accounting: Managing Accounts Receivable Could Save Your Business).
Billing problems: failure to send invoices to customers in time will lead to either delayed payments or no payments at all. With that, you may be required to invest more on accounts receivables, and this can increase the working capital requirements.
Increased sales: growth in sales is not a problem but joy to every business. However, an increase in sales increases the accounts receivables balances.
Changes in product mix: if you opt to replace old products with new products in your business, the inventory balances will increase as the old products will not be used.
Sales forecasting errors: if you make the wrong predictions regarding your business sales, the chances are that your business will overproduce, and these products will lie idle in warehouses, resulting to increased inventory balances. This is one of the reason why proper accounting is important.
Accounts payables reasons
New suppliers or payment terms: if you choose to work with new suppliers, short payments terms are advised and in this will reduce the accounts payable. Also, this will happen if the vendors require faster payments.
Early payment discounts: vendors tend to encourage early payments by giving discounts to those who make early payments, and if you pay early to get these discounts, the accounts payables will also decrease.
Every business requires monitoring on its working capital and cash flows (Also see Accounting: Cash Flow Forecasting Mistakes to Avoid) to ensure that it is stable. You can only achieve this by getting the right advice of help from an accounting firm in Singapore, a reason you need to Contact Us.