Effective working capital management is a major challenge for many businesses. This article summarizes 5 mistakes in working capital management from maintaining excessive inventory to lack of control over accounts receivable, along with detailed instructions on how to fix them. Understanding and applying the right solutions will help businesses maintain liquidity, optimize cash flow and grow sustainably.
1. What is working capital and why is it important to businesses?
Working capital (Working Capital) is an important financial indicator, reflecting the short-term solvency of the enterprise. Calculated by the formula:
Working Capital = Current Assets – Current Liabilities
Working capital helps businesses maintain day-to-day operations such as payroll, payments to suppliers, and other operating expenses. Effective working capital management helps maintain a steady cash flow and ensures the liquidity of the business.
Effective working capital management helps businesses:
- Ensuring short-term solvency: Helps businesses have enough cash to pay debts as they come due.
- Cash flow optimization: Minimize capital shortages or surpluses, helping to use financial resources effectively.
- Enhance competitiveness: Businesses with good payment capabilities will be more trusted by partners and banks.
- Ensuring sustainable development: Effective working capital management helps businesses maintain stable operations and develop in the long term.
2. What are the common mistakes in working capital management?
Effective working capital management is a key factor in helping businesses maintain stable operations and sustainable development. However, many businesses make common mistakes that lead to cash shortages, affecting their ability to pay and grow. Here are some mistakes to avoid:
Mistake 1: Why is it a mistake to focus too much on product quality?
Over-focusing on product quality can lead to “locking up” capital in inventory and lengthening production cycles.
Illustration: A shoe manufacturing company invested heavily in quality control of each pair of shoes, resulting in goods not being shipped on time and being left in the warehouse for a long time. As a result, capital was “frozen”, affecting the ability to pay and develop the business.
Solution: It is necessary to balance quality and production speed, focusing on features that bring real added value to customers. Apply effective quality management methods such as Lean Six Sigma to optimize production processes and minimize waste.
Mistake 2: Is it right to reward sales staff based solely on sales?
Rewarding salespeople based solely on sales can encourage them to accept long-term receivables, leading to cash flow bottlenecks and capital tied up in receivables.
Solution: Develop a bonus policy that combines revenue and debt collection efficiency. Encourage sales staff to maintain good customer relationships, promote debt collection and reduce debt collection time.
Mistake 3: Why shouldn't you manage receivables as payables?
Many businesses mistakenly apply the same payment policy to customers and suppliers. In fact, this can easily cause cash flow imbalances: customers often pay later while businesses have to pay suppliers on time. As a result, businesses lack cash to pay, reducing their ability to pay and affecting their reputation.
Solution: Analyze and establish separate payment policies for customers and suppliers, based on the characteristics of each partner and the financial situation of the business. Ensure that the debt collection period from customers is shorter than the payment period to suppliers to maintain a stable cash flow.
Mistake 4: Are payment ratios an effective measure?
Relying solely on current and quick ratios to assess liquidity can lead to ineffective management and pose the risk of cash shortages during crises.
Solution: Replace these ratios with a focus on the actual cash flow generated from operating activities. Use metrics like Operating Cash Flow and Cash Conversion Cycle to evaluate the effectiveness of working capital management.
Mistake 5: Is benchmarking your competitors a good strategy?
Relying on industry averages to gauge performance can lead to complacency and lack of motivation to improve, missing out on opportunities to innovate and create superior value.
Solution: Look for external industry benchmarks and focus on deep understanding of the business itself, customers and suppliers. Apply SWOT analysis, Value Chain Analysis to identify strengths, weaknesses and opportunities for improvement in working capital management.
3. How to overcome mistakes in working capital management?
Working capital management is vital to the financial health of a business. However, many businesses still make common mistakes such as Invoice processing manual, lack of debt control and difficulty accessing capital. Bizzi – a comprehensive financial technology platform – helps you effectively overcome these problems.
Automate invoice processing and expense management
Bizzi supports businesses Automate input invoice processing with IPA technology and 3-way matching, help:
- Extract accurate data in just 30 seconds, reduce 80% processing time and 50% operating costs.
- Check invoice validity, warn of tax risks immediately.
- Store electronic invoices securely, convenient for auditing and tax settlement.
This helps cash flow is not blocked by manual processes and errors in document processing.
Effective debt control and collection
Problem debt collection Slow payment is the main reason for "frozen" working capital. With the Accounts Receivable Management (ARM) tool, Bizzi supports automatic debt reminders, tracking important indicators such as DSO (Days Sales Outstanding), debt age, helping businesses improve cash flow and minimize bad debt. The system also provides detailed debt reports, supporting effective debt collection planning.
Flexible capital connection
Bizzi helps businesses access capital quickly through an online financial platform, connecting businesses with investors, providing flexible and effective lending solutions. When businesses are short of short-term capital, especially during peak periods or when customers pay late, Bizzi Financing provide solutions Supply Chain Financing (SCF):
- Advance capital from unpaid invoices without collateral.
- Quick procedure, receive capital within 24-48 hours, timely cash flow support.
Competitive interest rates, directly connected to the banking system and reputable investors.
Thanks to that, businesses can maintain steady cash flow, ensuring timely payment to suppliers and no interruption in production and business.
Seamless integration with ERP systems
Bizzi integrates flexibly with systems ERP existing, helping businesses improve their financial processes without replacing the entire system. This helps reduce costs and implementation time, while maintaining business continuity.
Let Bizzi be your “right hand” in working capital management, from automating financial processes to providing flexible funding, helping businesses optimize cash flow and grow sustainably.
- Sign up to experience the Bizzi solution suite: https://bizzi.vn/dang-ky-dung-thu/
- Schedule a live demo: https://bizzi.vn/dat-lich-demo/
4. Conclusion
Effective working capital management is vital to help businesses maintain liquidity and develop sustainably. Timely identification and correction of 5 mistakes in working capital management will help businesses avoid financial risks, optimize business operations and maintain stable cash flow. Applying strict management solutions and supporting technology is the key to improving capital efficiency.
