Working capital is the money you need to run your business on a daily basis. Placing an order, creating goods and services, stocking your items, and selling them to customers are all part of it. The most important thing is that the money you need is available at the appropriate time, in the right quantity, and in the correct location, which is what working capital optimization is all about.
The primary goal of working capital optimization is to keep the company's cash flow positive. So, in this article, we will explain how to improve working capital and an overview of various tools that aid in working capital optimization.
Industry Growth Forecast
Sales forecasting is critical to business working capital optimization. It is essentially forecasting the product's demand first, followed by your potential to sell.
For instance, if you sell tea powder. First, you must consider the demand for your product in the coming year in your specific region or state. Only then will you understand the demand for your product and whether it will profit you. It is critical to comprehend changes in consumer demand. You will learn where your industry stands and gain a better understanding of your customers' interests and preferences.
Cash is the driving force behind business transformation and growth
Cash is required for transformation and growth in the modern corporation; cash to power research, cash to fund acquisitions, cash to enter new markets, and cash to pay down debt and beef up the balance sheet.
Innovative businesses put their cash to work, accelerating growth and reducing risk in their supply chains. Strong liquidity and working capital management boost a company's perception and generate cash flow for strategic priorities such as R&D, M&A, and debt repayment.
Inventory management entails keeping track of all purchases, the total number of products available for sale, and maintaining stock. Inventory management helps you save money while also providing better customer service and satisfaction. The 80-20 rule can be applied here, that is, 20% of your products will be responsible for 80% of your turnovers, while the remaining 80% of your products will only generate about 20% of the turnover. Once you've identified the products that account for 80% of your revenue, you can produce more of them to increase sales.
Convert to electronic payables and receivables
Payment processes have been transformed as a result of the shift from paper to electronic transactions. Electronic payments are a well-known trend, but automating payables and receivables is critical to cash efficiency and accelerated cash conversion cycles. Automated payments and electronic payment processes can lead to favorable capital-saving payment terms, rebate structure savings, and significant cost savings.
Optimize the technology you already have
Technology is critical to effective working capital management.To close the gap, look for opportunities to collaborate more closely with IT. This new collaboration will provide a comprehensive view of the company's IT systems and better equip the organization to identify productivity killers that can be fixed with existing resources. Automation of outdated A/P and A/R tasks, as well as streamlining enterprise resource planning (ERP), could allow teams to focus their efforts on higher-value tasks.
In the 21st century everything is now digitized, the businesses that keep up with digitization survive in the business field. Digitization is the use of new technologies and digital form data to enable or improve processes. As a result, digitalization implies digitization. Digitalization improves a current business process or processes without changing or transforming them, increasing effectiveness and competitiveness while lowering costs. That is, it converts a process from a sentient event or series of events to a software-driven event or occurrence. We have previously talked about “How to Innovate Your Business by Chasing Digitalization”, you may want to check it out.
Of course, critical technology implementation should always be an option. However, before making any additional capital investments, form a cross-functional team to examine and exhaust all of your internal IT solutions.