Every company or business that intends to effectively manage its liquidity, improve its creditworthiness, reduce risks and the effects of seasonality, demonstrate growth potential, run smoothly, and maintain financial stability must place a high priority on working capital management.
With a growing youth population and a dynamic consumer base, businesses using these opportunities to maximize are not immune to Nigeria’s attendant challenges in terms of economic growth and development, infrastructural issues, abysmal regulatory policies, and many others.
These challenges arise daily as businesses attempt to manage their current assets as well as liabilities as working capital is the lifeblood flowing through the veins of any business.
What is Working Capital ?
Working capital refers to the total amount of money or funds available to a business or company to meet its short-term obligations (i.e., current liabilities) and operations (i.e., Current Assets). It is of importance to note that current liabilities in this case point to all forms of commitments such as trade payables, short-term loans, and accrued expenses to be fulfilled within a year.
On the other hand, current assets are cash or cash equivalents in terms or cash, trade receivables, inventories as well as short-term investments. In as much as it is vital for businesses to have a positive working capital, there is a need to mitigate excess cash as this clearly indicates an ineffective utilization of cash.
Also, businesses need to be mindful of ensure that the occurrence of insufficient working capital is prevented as this can possibly result to liquidity issues and serve as a potential hinderance to business growth.
Working Capital Management strategies
- Build a comprehensive cash flow model: Business owners and people in charge of operations must have an in-depth knowledge of cash inflows and outflows. In this regard, firms must pay close attention to properly and precisely factoring sales, investments, loans, debts, and expenses so that all cash inflows and outflows are captured. Although projecting possible disruption and variations in cash flows can be characterized as attempting to see into a crystal ball in some situations, it is critical for businesses to anticipate periods of surplus and scarcity in cash flow based on economic and market studies.
- Effective Inventory Management: Businesses that manufacture physical products must successfully guarantee that excess inventory beyond current and imminent production capability is avoided, as this can lead to spoilage and quality decline. Furthermore, understanding the proper cost and value of stocks will aid in arriving at a balance that ensures minimal or no excess inventory without severely influencing output. Infusing just-in-time inventory management will be extremely beneficial in minimizing surplus stocks and having inventories that are required for production at a specific time and season. Nevertheless, improving inventory turnover will be instrumental in this regard as this can be done through efficient order management, improving suppliers’ relationship as well as demand analysis and forecasting.
- Accounts Receivables Management: It is impossible to ensure good working capital management without considering how businesses manage their accounts receivable. This can be achievable by doing careful consumer screening and analysis while considering their respective creditworthiness levels. Additionally, businesses can benefit from understanding their credit histories, invoices, financial records, and payment histories. Incentives like early payment discounts and flexible payment terms can also be helpful tools for efficiently managing accounts receivable. This is not to mean that other recovery strategies, including late fees and reminders, ought to be disregarded.
- Accounts Payables Optimization: Account payables often have a direct impact on a company’s performance. Maintaining solid relationships with suppliers is one of the critical steps that can be beneficial. Suppliers who pay on time and consistently demonstrate dependability, which helps to develop the business-supplier relationship. Another technique is to ensure that the company and its suppliers communicate well. Keeping suppliers up to date on payments and other related developments promotes openness.
- Building effective cost-minimization measures: Businesses must strike a balance between cutting costs without sacrificing quality considering the dynamic market environment of the Nigerian economy. This can be accomplished through optimizing resource allocation, optimizing production processes, and removing bottlenecks. Businesses will greatly benefit from capital investments in automation and technology.
- Asset utilization: Conducting an in-depth assessment of all fixed assets of a particular business should never be ignored. In doing this companies can continuously keep to tab with their fixed asset value, useful life span which helps in disposing assets that are of no immediate importance to business operations. Furthermore, business can also leverage on leasing of assets in situations where acquiring such asset will pose a huge financial burden on the cashflow management.
This article shed light on how businesses can effectively manage their working capital to achieve growth. It emphasizes the significance of working capital management in improving a company’s liquidity, creditworthiness, risk reduction, growth potential, smooth operations, and financial stability.
It also provides practical tips for optimizing working capital in businesses. The article concludes by stressing the importance of prioritizing working capital management to maximize growth opportunities.
Abdulsamod Balogun leads Communications and Public Relations at Leonine Investment Services Limited. He's excited about new media, technology and public policy. When he's not working, he's catching up on movies and books.
