Working capital is a key indicator of financial health. Therefore managing working capital is essential. You must constantly be alert to changes in your working capital position to ensure it remains strong, making adjustments as follows:
- Cash and Equivalents – Keep your cash levels adequate to cover expenses, but employ your excess cash to reduce borrowings if you are using a revolving line of credit.
- Accounts Receivable – Ensure your receivables are being collected on a timely basis. Managing collections maximizes liquidity and reduces the risk of a significant bad debt.
- Inventories – Consider quantity and mix. Excess and obsolete inventory can absorb valuable liquidity.
- Accounts Payable – Manage the money owed to suppliers within terms. If you find yourself falling behind, effective communication with suppliers is important.
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