Working capital is the most important asset of a manufacturing business as it affects the long-term financial health of the business. So, proper management of working capital is very important in order to sustain a healthy cash in-flow. Let’s take a look at 5 important and effective working capital management tips for a manufacturing business.
Table of Contents
Pay on Time
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A disciplined method of paying suppliers and vendors on time help in developing a strong relationship with them. And as a result, the manufacturing business owner would stand on the ground to negotiate deals and get good discounts. And if the suppliers are happy, they offer good discounts on bulk and recurring orders. This strategy will help in maximizing the credit period and saving money.
Plus, paying suppliers on time also adds to creating brand value in the market.
Efficient Collection System
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It is absolutely imperative to develop a collection system for a manufacturing business. You are recommended to send invoices as soon as the purchase is made in order to cut delays in payment. In addition, you can deploy technology for delivery of invoices online to bolster faster billing process and collection.
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We would recommend you to not to wait until the end of the month to send bills to the clients and customers. Send them as the purchase is made. Additionally, ensure that the bills are accurate to avoid any delay. This will shorten the cash cycle. Also, it’s a good idea to send the clients and customers a reminder regarding payment.
Inventory Management
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Effectively managing inventory is one of the fundamentals pillars of effectively managing working capital for a manufacturing business. It’s important to maintain a good level of inventory but not under or over maintain it. Else, this can take a toll on working capital for the business. Over maintaining inventory will result in the outflow of cash for its maintenance whereas under maintaining it will hit the sales hard. And therefore, revenues.
Hence, you are suggested to keep a check on the inventory levels and address it in case of under or over maintenance.
Discount with Care
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Customers and clients always expect big discounts. However, offering them for a long period can affect the working capital of the manufacturing business. It is suggested that you know the accurate cost of production and the sales margin. This will help in telling the dealers the exact limits that they can offer.
Effective Planning
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As a businessman, you must know the potential of your business. You can analyze the requirements of your business to understand its working capital requirements. A manufacturing business requires funding at various stages. And at this step, working capital is the oxygen for your business. Proper planning and its execution will help in running the business in the right direction and also in smooth management of funds.
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