What are the best practices for working capital optimisation?

The best practices for working capital optimisation include efficient inventory management, timely collection of receivables, and prudent payables management.

Working capital optimisation is a critical aspect of managing a business's financial health. It involves managing the company's current assets and liabilities to ensure sufficient cash flow. One of the best practices is efficient inventory management. This means having just enough inventory to meet demand, without tying up too much cash in stock that isn't selling. It's a delicate balance, as having too little inventory can lead to lost sales, while having too much can lead to wasted resources.

Another key practice is the timely collection of receivables. This involves ensuring that customers pay their invoices on time, which can be achieved through effective credit control procedures. For example, offering early payment discounts can incentivise customers to pay sooner. It's also important to regularly review the company's credit policies and to follow up on overdue accounts promptly.

Prudent payables management is also crucial. This means negotiating favourable credit terms with suppliers, such as longer payment periods or discounts for early payment. However, it's important not to delay payments so much that it damages relationships with suppliers or incurs late payment penalties.

Cash flow forecasting is another important practice. This involves predicting the company's future cash inflows and outflows, which can help identify potential shortfalls in advance and allow the company to take corrective action.

Finally, companies can optimise their working capital by investing surplus cash wisely. This could involve placing it in interest-bearing accounts or using it to pay down debt, depending on the company's financial situation and strategic goals.

Remember, the goal of working capital optimisation is not just to maximise cash on hand, but to balance the needs of the business with the efficient use of resources.