Question

It is estimated that around 60% of small businesses fail because of poor management of working capital.

(b) Discuss the methods a business could use to improve the management of working capital.
Word Limit: 450 words

Answer 1

(b) Business could improve their working capital management by following ways:

1. Improve inventory management: We can prevent significant working capital from freezing by avoiding overstocking of raw materials, work in process jobs and finished goods. JIT is very useful to obtain efficiency in inventory management.
2. Automation in account receivables: Automation will help business to improve and fasten the process of account receivables. Also the chances of error are reduced significantly. This will lead to reduction in delays of payments and hence help in improves working capital.
3. Quick resolution of disputes with customers and suppliers: Lot of receivables are due because of disputes. Business should develop a mechanism to resolve dispute as soon as possible. Try to resolve disputes through making understanding via communication. However, if dispute goes to court, try to resolve it as soon as possible to avoid further expenses for fighting case. Most of the disputes are resolved outside court through establishing communication since they are originated because of mis understandings.
4. By giving incentives on receivables to improve collections: Business can give incentives to customers or dealers who pay their receivables within agreed time to encourage timely payment. This will have direct impact on working capital.
5. Obtaining maximum tax opportunities: Business should ensure if they are having maximum tax benefits. This additional saving can be directed to increase working capital.