Question

explain and detailed four working capital management strategies to ensure the company remain competitive in the market. 75 words minimum for each point

Answer 1

Working Capital Management Strategies:

1. Managing procurement and inventories: Keeping more inventories blocks the cash whereas maintaining less inventory could result in fewer sales and damage to customer relationships. So optimum stock level should be maintained which could be done by JIT (just in time strategy) or improving the communication between the forecasting team and the external suppliers which would reduce the lead time. It will also help in the reduction of storage cost, insurance cost, and chances of inventory getting obsolete.
2. Improving the Receivables and collection efficiency: In cash to cash cycle, the collection period is a major component, and the lesser the collection period better it is for a company as the cash blockage period is less. The company can hire an external collection agency to accommodate an efficient collection system in place. Delivering invoices electronically reduces the margin of error and speeds up the billing and collection process. Maintaining an accurate debtor ledger also says with whom a large chunk is pending and should be collected as soon as possible.
3. Negotiation with vendors would allow enjoying more credit period: For this, a company needs to have a good history of repayment which would reflect a discipline in it. It has a huge impact on the cash cycle as on increasing the payment period or credit period the cash cycle reduces so they share an inversely proportional relationship. Companies that pay on time develop better relationships with their suppliers and are in a stronger position to negotiate better deals, payment terms, and discounts.
4. Managing the debtors of the company effectively: Working capital management means proper utilization of money by improving the cash cycle and cash management so that a situation like cash crunch dosen't happen in the company. So it is very essential to see wether the credit period winfow provided to the debtors are not too big. Also multiple financial checks like liquidity position and repayment history of the customer should be done to avoid bad debts as it is a loss for the company.