What areas should be considered in a business? Most businesses make the mistake of focusing solely on profitability. Did you know that liquidity is another pillar that makes a business stand upright? Liquidity is obtained by effective working funds management. The concept is similar to a person’s living expenses – where some money is needed to meet certain costs such as food, housing, and health. In this case, the business needs some cash to cover costs and short-term debt. Most of the assumptions that say “if you make a profit, you will have enough money” are wrong. To ensure growth and development, you need to manage your existing working capital.
Before you set a path to grow and grow your business, find out your current working capital ratio. Divide your current assets such as cash, inventory, and receivables based on current liabilities, including debt such as supplier payments, taxes, and payments for long-term business financing. If this ratio turns out to be less than one, it means the business does not have enough working capital to be able to pay short-term obligations. While the standards vary according to industry considerations, ratios greater than 1 imply the business is in a good financial position to grow further. Too much inventory can tie a large portion of cash, while also increasing storage costs. On the other hand, too little inventory can lead to loss of potential sales. The solution is to predict purchase demands based on sales history, which will allow you to maintain sufficient inventory.
The best way to ensure proper working capital management is to send invoices and invoices immediately, which can be considered as ‘Accounts Receivable’ and increase working capital. It is important to establish good credit practices and processes with clients. If you usually provide a payment period of 30 days, try to request payment within 15 days. Give discount offers to clients who are willing to make payments quickly. Through this method, business cash flow will move faster and avoid bankruptcy that might occur. On the other hand, you can negotiate with suppliers for better payment terms. Avoid paying earlier than the payment date. To maximize the investment function, you should also have more than one vendor.