Working Capital Management

Do you examine opportunities to reduce working capital levels and increase asset utilization?

A. No.
B. Very rarely we examine opportunities to reduce working capital.
C. Every now and then, we examine opportunities to reduce working capital levels and increase asset utilization.
D. We identify and implement opportunities to reduce working capital levels.
E. We systematically identify and implement opportunities to reduce working capital levels and increase asset utilization.
[Score:  A=0, B=1, C=2, D=3 and E=4]

 

Why is this question important?

Excess working capital in effect means operating inefficiencies. Money that is tied up in inventory or money that customers still owe to the company cannot, as a result, be used to pay off any of the company’s obligations. So, if a company is not operating in the most efficient manner (e.g. slow collection of debtors), it is reflected as an increase in the working capital. Any increase in working capital requires funding – either in delayed payment of creditors, unpaid taxes or increased borrowings.

Credit-worthiness

If you don’t know a new customer’s credit record, there is a risk of being paid late or worse still, not being paid at all.  Always get new customers to complete a form authorising you to get bank, credit and trade references.

Typically this form would include:

  • The full name and address of the business and the legal structure – sole trader, partnership, limited liability partnership and whether it also trades under any other names
  • Who owns the business and full contact details
  • What credit limited is being requested
  • Bank account details
  • A request for permission to make bank reference checks
  • A request for permission to get a credit check from a credit reference agency
  • A request for permission to get a minimum of two trade references

Make the necessary checks with the customer’s bank, a credit reference agency and some of their suppliers – amazingly many gather all of the information detailed above and then never make the necessary checks!

Collections Procedures

Not only is getting paid on time important, it actually enables you to build better relationships with your customers.

Some business owners find it difficult to contact a customer and ask for payment, but the ability to do so is a necessary skill if you want your business to remain solvent and healthy.

Remember consistent attention to overdue payments will shorten the time it takes you to collect.

Getting your invoicing system and payment terms right can be critical to a healthy cash flow. Try to ensure your customers realize how much they need to pay and when they must pay up. They are more likely to pay you on time if terms and conditions are clearly set out in writing from the start.

Persistence is very important and necessary to ensure that your customers pay on time.

Inventory Control

Inventory control, also known as stock control, is used to show how much inventory you have at any one time, and how you keep track of it.  It applies to all items you use to produce a product or service, from raw materials to finished goods.  It covers inventory at every stage of the production cycle, from purchase and delivery to using and re-ordering the inventory.

Efficient inventory control ensures you to have the right amount of inventory in the right place at the right time. It ensures that money is not tied up unnecessarily, and protects production if problems arise on the supply side.

There are several methods for controlling inventory, all intended to provide an efficient system for deciding what, when and how much to order.

A computerised system is a good option for businesses dealing with many different types of inventory. Advantages include:

  • Quickly get a inventory valuation or find out how well a particular item of inventory is moving
  • Information is much easier to access
  • Inventory management integrates with your accounting and invoicing system
  • Automatic inventory monitoring, flagging orders when the re-order level is reached
  • Identifying slow-moving or obsolete inventory

Obsolete Inventory

Inventory can tie up a large slice of your funds, so accurate information about inventory levels and values is essential.

Figures should be checked systematically, either through a regular detailed inventory-take – or a ‘rolling’ inventory-take (on-going sequence of checking inventory).

Obsolete and slow-moving inventory should be quickly identified and sold, even at knock-down prices to free up funds.

Appropriate Inventory Levels

Deciding how much inventory to keep depends on the size and nature of your business, and the type of inventory involved.

Keeping minimal inventory levels might suit your business if:

  • it’s in a rapidly changing environment where products change rapidly
  • the inventory is expensive to buy and store
  • the items are perishable, or
  • refilling inventory is quick and easy

Keeping lots of inventory might suit your business if:

  • sales are difficult to predict and it is almost impossible to determine how much inventory you need or when you will need it
  • you can store plenty of inventory cheaply
  • the products you buy are unlikely to become obsolete, or
  • they take a long time to re-order

If you are short of space you may still be in a position to buy inventory in bulk and then negotiate with your supplier to store it, calling it off as and when needed.

Suppliers are ‘Strategic’

It pays to build good relationships with your key suppliers.

If you can drive a better bargain or improve the quality of the goods or services you buy from your suppliers, your business will benefit.  Meet your key suppliers and get an understanding of how their business operates.  Ensure you meet the people who will manage your account.  Negotiate reasonable and fair terms and conditions – place orders in good time and pay on time.

The performance of key suppliers is important to your business.  You should discuss ways both you and your supplier can reduce costs and improve service levels.  Keep them informed of significant developments in your business and ensure you are informed of important developments in their business.

Don’t ignore opportunities offered elsewhere. Keep your options open by monitoring the deals offered by other suppliers.

Reduce Waste & Inefficiency

You can better control waste and inefficiency:

  • Analyze every operation and activity, and eliminate idle time and non-productive steps …
  • Recruit carefully – mistakes are expensive, very …
  • Use available employee capacity to the maximum extent …
  • Reduce scrap, rework and customer service problems by personally working to improve the performance of everyone …
  • Keep employees continuously aware of cost and quality challenges, pointing out that conscientious cost control can contribute hugely to ensure the continued success of the business …

What questions should you ask?

  • Cost of supply
  • Is the business making and buying the right products/ services?
  • Are you putting your business skills and talent and competitive advantages in the right place?
  • Is the company eliminating waste?
  • Can you buy better?

Value Focus

  • Do you understand where value is being created or lost?
  • What is the true product net profitability?
  • What profits are your activities generating and where are you wasting money?
  • How can you strip out ‘no value added cost’?

Business Overheads

  • How much overhead delivers value and how much is just ‘Overhead’?