Steps to improve working capital with capital forecasting software
What you’ll learn
The importance of working capital and working capital management solutions
Ways for a company to increase its working capital
What is working capital, and why is it important?
Working capital is the money available to satisfy current and short-term commitments. It is critical to guarantee that a company has enough cash to meet its daily requirements. Working capital is calculated by using the formula:
Working capital = current assets / current liabilities
Working capital influences many parts of a business, such as paying employees and suppliers and planning for long-term growth. In a nutshell, working capital is the cash a company has in hand to pay for immediate and short-term obligations.
The net working capital tells how much money is readily available to meet current expenses. Net working capital is calculated by using the formula:
Net working capital = current assets - current liabilities
Running short on working capital adds to stress and causes obstacles in business operations.
Steps to improve working capital
The following are the ways to improve working capital:
Ensure a good net working capital ratio: NWC ratio is calculated with this formula: working capital ratio = current assets / current liabilities. Set a goal to get a good NWC ratio. A working capital ratio of 1.0 or below suggests all working capital has been used, leaving no space for correction. A 2.0 or greater quotient might mean that resources are being wasted. A budget revaluation may indicate the need for new equipment or better marketing to stay competitive.
Automate repetitive and administrative tasks: Manually handling corporate money is inefficient and error-prone. Embracing automation is key to managing finances efficiently. This is because the data is gathered from multiple sources seamlessly and updated in real-time. It requires no or less human intervention, saving time for decision-making activities.
Incentivize receivables to ensure early payments: A business owner must create relationships with clients, suppliers, and vendors. Automated cash management may help in identifying on-time payers. Give these buyers incentives to promote on-time payment. This will help build a strong relationship with buyers and increase working capital.
Set a penalty for late payments: The company must both reward early payments and penalize late payments. This encourages buyers to pay on time and speed up invoicing.
Use data analytics to keep track of the business performance: Most companies embrace data-driven management and decision-making because statistics are more trustworthy. Data analytics eases working capital management, report generation, compliance monitoring, and operation evaluation. It allows analyzing the business’s activities to see whether they match the financial objectives or not.
Sort out problems with customers and suppliers: Disputes are inevitable when the firm grows and trades with more customers. Resolve disagreements swiftly to keep buyers, clients, and partners happy. When issues aren’t resolved swiftly, receivables get frozen. To prevent this, review customer and supplier rules and agreements. Find what’s lacking, unclear, and conflict-prone.
Leverage a suitable capital forecasting software: Choose the best capital forecasting software for the company based on its needs and demands. Not all software provides the desired functionality; hence proper research is required for the company to benefit from capital gains.
What are common working capital problems?
Small and mid-sized companies often face the following problems due to a lack of sufficient working capital:
Limited cash flow
Small company owners have to cover a broad range of recurring expenses. These firm expenses may include rent and other bills, purchasing items, and paying employees. Even if they don’t have a lot of other monthly expenses, these costs may soon add up. Businesses often find themselves short on funds to cover unexpected expenses. Hence, they won’t be able to carry out these critical processes if they don’t have a proper solution for forecasting working capital.
Poor borrowing and investing
Due to inaccuracy in forecasting working capital, borrowing and investing money in the wrong places may happen. The money, if invested properly, can lead to significant profits for the company. On the contrary, it can lead to extreme losses and bankruptcy if proactive investment decisions are not made timely.
How does a company increase working capital?
A working capital solution for forecasting working capital helps a business by:
Using HighRadius capital forecasting software as a working capital solution:
The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.