How to Increase Working Capital
Working capital allows a business to continue its everyday operations. Inadequate working capital might lead to interruptions in company operations. Hence, working capital is an essential part of operating a company effectively.
Three Elements Of Working Capital
Inventory + Receivables – Payables = Working capital
Accounts receivables are cash invoices due from clients. Inventory is the current assets, like spares parts, raw materials, and goods for resale.
Accounts payables indicate what your business owes to the suppliers for products and services purchased on credit.
From the equation above, we know that receivables and inventory increase the working capital and account payables reduce it.
How To Increase Working Capital?
Every element of working capital needs to be handled well. Here are some factors that could increase your company’s working capital.
When there is growth in sales, it is not an issue but a good sign to the business (Also see Managing Accounts Receivable Could Save Business). The accounts receivables balances will increase when the sales increases.
If you failed to send out the invoice to clients in time, your company might face either postponed payments or no payments at all. Hence, you have to pay more attention to accounts receivables to boost the working capital.
Inappropriate credit granting:
When you do not have a great criterion to identify the consumer creditworthiness, you might sell services and products on credit to customers who might not make payment. If you do not check regularly, this might result in zero receivables.
Sales forecasting mistakes:
Your company will overproduce if you make the incorrect forecasts concerning your business sales (Also see Cash Flow Forecasting Mistakes to Avoid). These goods will lie idle in the warehouse, resulting in increased stock balances.
Modifications in product mix:
The inventory balances increase because the old goods are not used when you replace old goods with new goods in your company.
Accounts Payables Factors
New payment terms or suppliers:
When working with new suppliers, you should use short payments terms to minimise the accounts payable. This will take place if the suppliers want fast payments (Also see The Importance of Accounts Payable Process).
Every company needs to keep track of its cash flow and working capital to make sure that it is stable (Also see Accounting Tips for Restaurant Operators). You could easily accomplish this by engaging our accounting services in Singapore to obtain the best advice for your business.