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Four things you need to know about working capital management

by , 03 September 2014
Working capital is made up of debtors, creditors and inventory (stock).

You need to manage your working capital effectively. If you don't, you could end up tying up large sums of money in debtors, creditors and inventory. And this means you'll need to find another source of cash to pay day-to-day expenses.

The good news is you can avoid problems like these if you know the following four things about working capital management.

Here are the four key points you need to know about working capital management

#1: Don't over buy inventory

If, for example you buy stock, but it doesn't move quickly enough, cash (which could be used for essentials like the water and lights bill) is tied up unnecessarily.

#2: Always check the credit worthiness of customers

You can ask new customers to give you two good references, including one from a bank, before you grant them credit.

You can also check their credit ratings through a credit rating agency.

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#3: Always give customers statements and remind them to pay! 

You must send out invoices immediately after delivery and check that invoices are accurate, says the Practical Accountancy Loose Leaf Service.

The Loose Leaf goes on to say that if this doesn't happen as promptly or as accurately as possible, disputes could arise, which could delay getting the money you want to collect.

In addition investigate queries, complaints and credit notes swiftly and issue monthly statements early.

#4: Maintain good relationships with creditors

The best way to manage creditors is to manage the relationship you have with them. If you manage the relationship well, it'll become easier to negotiate longer payment terms.

There you have it. Knowing these key points will help ensure you manage your working capital effectively.

PS: We strongly recommend you check out the Practical Accountancy Loose Leaf service.  It will show you how to improve your cash flow, eliminate simple accounting mistakes, analyse your financial statements, identify errors, slash your audit fees and eliminate fraud in your company.

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