Set planning standards for stock days, debtor’s days and creditor days.
4 : A sound working capital management policy
1. Set planning standards for
stock days, debtor’s days and creditor days.
2. Having set planning standard (as above) - keep up to them. Impress on staff that these targets are just as important as operating budgets and standard costs.
3. Instill an understanding amongst the staff that working capital management produces profits.
1. Keep stock levels as low as
possible, consistent with not running out of stock and not ordering stock in un-economically
2. Consider keeping stock in warehouse, drawing on it as needed and saving warehousing cost.
Rules on Debtors/Customers
1. Assess all significant new customers for their ability to pay. Take references, examine accounts, and ask around. Try not to take on new customers who would be poor payers.
2. Re-assess all significant customers periodically. Stop supplying existing customers who are poor payers-you may lose sales, but you are after quality of business rather than quantity of business. Sometime poor-paying customers suddenly find cash to settle invoices if their suppliers are being cut off. If customers can’t pay / won’t pay let your competitors have them- give your competitors a few more problems.
3. Consider factoring sales invoice – the extra cost may be worth it in terms of quick payment of sales revenue, less debtors administration and more time to carry out your business (Rather than spend time chasing debts)
4. Consider offering discounts for prompt settlement of invoice, but only if the discounts are lower than the costs of borrowing the money owed from other sources.
1. Do not pay invoices too early - take advantage of credit offered by suppliers - it’s free!!
2. Only pay early if the supplier is offering a discount. Even then, consider this to be an investment. Will you get a better return by using working capital to settle the invoice and take the discount than by investing the working capital in some other way?
Tags : Financial Management - WORKING CAPITAL MANAGEMENT
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