Six Ways in Which Working Capital Pool Can Be IncreasedMay 21, 2018
A company, whether big or small, would have a lot of assets and liabilities on paper, but those can actually contribute to the running of the company only when they are converted to cash. Working capital allows companies to handle the regular expenses on a day to day basis. Some of these expenses are salaries, incentives, rentals, fuel, stationery, and also raw materials. But in most companies, the importance of adequate working capital is visible only to a few senior finance executives, and not to the other employees.
Let us look at a few ways in which all employees can be sensitized to work on improving the working capital reserves of a company :
Every piece of finished goods inventory costs money for storage and security, but doesn’t bring in revenue. The lower the levels of inventory, the faster will the finished goods get converted into cash and contribute to working capital. Not only the finance department but also the production and marketing departments need to be cognizant of this and work together to reduce production of goods which are not moving as fast off the shelves.
Every company has some fixed costs, which will accrue at the same level on a regular basis, and some variable costs, which would vary according to the levels of production and sales. A thorough scrutiny of these should be done to check which of these costs can be reduced. As an example, let’s say a school has to buy a printer which would be used for printing certificates once a year or at most 3-4 times a year, at the end of each term. The CFO could check the costs of hiring a printer during those occasions and compare it with the purchase and maintenance cost of a printer.
At regular intervals, the credit terms with suppliers, vendors and business partners should be looked at and renegotiated where possible. If a standard agreement is difficult to renegotiate every time, it might make sense and be easier to take a fresh look at terms for specific products which might have a faster turnover. Similarly, if the payments to be made to business partners can be renegotiated with a longer period, then the working capital would increase.
Every company gets some windfall profits from time to time. Instead of parking those funds in cash reserves, it would be a better idea to repay some of the existing debt. What that will do is to either reduce the tenure of the debt, or reduce the monthly repayment amounts, and in either case, there will be a positive impact on working capital.
In case a start-up is in the first few years of its existence, then there are several tax benefits provided. Even if the company is not from IT, there are several tax benefits that are offered. A close watch on such opportunities can help the company channel some tax savings into the working capital pool.
There is often a payoff to be had when some money is spent in order to bring back the money. For example, if a company offers some money to its debtors to pay their dues faster, then the money spent will cost less than the interest on the due amount that is received late. Similarly, it might make sense to pay a marginally higher rate to a supplier if he agrees to a longer payment cycle.
As can be seen from the above six-pointers, every department of the company will need to contribute in their own ways to help improve the working capital situation.