Working capital can be described as the funds used to run day-to-day business operations such as buying raw materials and services, paying your employees and keeping the lights on.
Maintaining consistent cashflow to offset expenses and well thought out investments is crucial for healthy operations. In times of economic uncertainty, it can be even more critical for business owners and finance leaders to have a clear understanding and control over their company’s working capital.
While there are many scenarios that could lead to financial inefficiencies, we’ve identified three considerations that you can focus on now to improve your working capital:
- Paying too early. Consistently paying your suppliers too early is equivalent to giving them an interest-free loan. To measure whether your company has a gap like this in place, start by reviewing the vendor terms specified by the contract, invoice or vendor master. Then, measure the terms against the actual payment performances. You can calculate the gap between what and when you are currently paying your suppliers versus what and when you should be paying them.
- Paying too late. While financial disincentives for late payments can exist and vary, paying too late can also cause issues in your supplier relationship itself. While addressing this issue isn’t a particular area where you will recover lost funds (at best, maybe minimize penalty payments), you can, however, proactively find and eliminate a potential pitfall in your supplier relationship.
- Modeling Payment Terms. Let’s say your company has been doing a great job optimizing all current terms and is now planning a payment term change program to shift a certain number of suppliers from Net-30 to Net-60 or 90. Having a rapid modeling platform that can calculate potential gains for specific vendors would be valuable in setting the right targets.
Want to learn more?
If you’re not already actively measuring and managing your payment terms, you’re leaving valuable working capital uncaptured.
Download the Three Considerations for Optimizing Your Days Payable Outstanding e-book where we offer in-depth insight into doable ways you can improve your working capital and ultimately your bottom line.