Best Ways to Increase Working Capital Management for Business Success

Best Ways to Increase Working Capital Management for Business Success

Working capital is an important metric in assessing the long-term financial health of a business, immaterial of the size of the business, ensuring that adequate cash flow is made available to fulfil short-term commitments. 

Effective working capital management serves to optimize the operating cycle, minimize the cost of working capital, and maximize the return on current asset investments. The best working capital management practices include a multitude of narrowing formulas that measure performance.

Few tips for improving working capital

Keep your networking capital ratio in check 

Set your goal to get a good networking capital ratio. You can calculate this metric by using the same numbers you used in your NWC with this formula: 

Working capital ratio = current assets / current liabilities.

Some businesses overlook their working capital ratio because they just see it as additional work. But for any serious business that wants to establish trust with its shareholders and secure additional funding for future growth, having a stellar working capital ratio is important. It also provides a measurable basis to secure business financing by reflecting the efficient handling of your business’s resources. 

Improve your inventory management 

The inventory is one of the things being checked by investors and shareholders to determine the operational efficiency and viability of your business. The high liquidity of your current assets could reflect insufficiency in product demand. On the other hand, a large inventory may decrease your business’s current assets due to unnecessary expenses and wasteful expenditures such as an increase in warehousing costs.

Choose the right KPIs to measure and set target performance metrics 

The driving factor in managing working capital within a company is to use key metrics to assess overall working capital health and performance. Competitive businesses measure working capital KPIs quarterly or monthly, assess performance next to competitors and industry-leading organizations, utilize benchmarks, and set targets for efficient, higher working capital. 

All businesses should continually measure liquidity with the working capital ratio and the cash conversion cycle (CCC) on a monthly basis to monitor when working capital management operations require improvements.

Manage expenses better to improve cash flow 

Cash flow is the ultimate value driver in any business. With this, your working capital is highly affected when assets are tied up in things like inventory or unpaid invoices. In business financing, having negative cash often scares investors and shareholders away and this can result in the undervaluation of a business if not remedied. In the worst cases, businesses are unable to pay their bills and may be forced to close down.

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Receive adequate financing 

Utilizing short-term business loans is one of the tips for working capital and better management. Receiving working capital financing to increase working capabilities is achieved by possessing enough liquidity to finance current operations without taking on excessive risk. Analyzing working capital KPIs, sources of working capital, and determining working capital needs can direct a business to carefully select the right financing solution and adequate fund size for forecasted operational needs.

Another financing option recommended to free up current working capital would be to refinance an existing loan to earn lower debt payments with an extended loan term.

Meet your debt obligations 

The way you manage your debts can also affect your working capital position. Manual processing is often the reason why late or missing debt payments happen, thus leading to penalties. 

Ensure that you pay your debts on time to avoid delays and penalties. Electronic payment systems can help manage your dues so that your payments are timely. 

Whether a company utilizes working capital financing through an alternative lender or tightens up inventory operating activities, working capital strategies that involve performance metrics, benchmarks, and accountable people can drive a business to achieve long-term success. Regardless of the sources of working capital, management improvements can generate more cash for a business, increase operational efficiency, and raise profitability and potential growth.


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