Working capital cycle refers to the time taken to convert current assets and liabilities into cash. For instance, if you pay your suppliers in 30 days, but collect payment in 90 days, your [url=https://www.bajajfinserv.in/insights/the-life-cycle-of-working-capital-explained]working capital cycle[/url] is 60 days. The lower your working capital cycle, the better it is for your business.
The span of your working capital cycle is one among several factors dictating the success of your venture. Given below are some key ways through which you can reduce this cycle to improve liquidity and subsequently business efficiency.
[ul][li][b]Cut the gap between accounts payable and accounts receivable[/b][/li][/ul]Accounts payable refers to the amount you owe to suppliers while accounts receivable is the money you are to receive from customers. It is in your interest not to extend the accounts receivable past accounts payable as in such a scenario you need to pay suppliers from your existing capital. This can hamper the working capital cycle and retard growth and efficiency.
You can cut the gap between accounts receivable and payable either by encouraging customers to pay as soon as you provide them with a service or by extending the date for suppliers. If you have an internal billing team, encourage and incentivise them on making timely collections from customers.
[ul][li][b]Automate the accounts receivable process[/b][/li][/ul]An efficient way to lower the working capital cycle to bolster business efficiency is to automate the accounts receivable process with the help of a software. Manual handling of the process is not only labour-intensive, but also leaves scope for error. There can be cases when the billing team might miss to raise an invoice. Also, if a key member of the team leaves, training a new employee with the entire process is time-consuming and tedious.
On the other hand, automating the process through a software streamlines the entire operation and brings down chances of error. It also reduces dependability on a single member and with an automated system, customers receive digital invoices as soon as they receive any service. Such software also sends automated reminders in case of a delay in payment.
[ul][li][b]Resolve disputes with suppliers and customers[/b][/li][/ul]Disputes are a part of a business. With so many variables involved, there are chances of discrepancies cropping up anytime with suppliers and customers. What’s important, however, is to resolve them at the earliest for maintaining good relationships, getting paid with a reasonable time and bringing down the working capital cycle in the process.
An ideal way to resolve disputes with suppliers and customers is to go through the contract document and look for areas of potential conflict. See what’s missing and make sure the terms and conditions are well-understood. Note that disputes tie-up a company’s time and money, all of which can deplete existing capital and increase the working capital cycle. In that case, the use of [url=https://www.bajajfinserv.in/insights/supply-chain-management-what-every-businessman-should-know]supply chain management[/url] system also can be an effective solution.
[ul][li][b]Better management of inventory[/b][/li][/ul]An essential part of operations is inventory management. You need to identify items that are not selling, prevent overstocking and know when to order a particular product. To do so effectively, you can deploy a software which will provide you with real-time updates.
In case you have your retail stores, integrating all the point-of-sale with the inventory management software will help you see the items sold and return instantly. This will help you raise an invoice accordingly along with paying and receiving payments on time. Thus, prudent management of [url=https://www.bajajfinserv.in/insights/inventory-management-all-you-wanted-to-know]inventory management[/url] keeps your working capital cycle in shape, resulting in enhanced business efficiency.
Take note of the different kinds of working capital, fixed and variable, while brainstorming ways to reduce the cycle and improve the efficiency of your venture in the process.
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