How to Improve Working Capital Management

Working capital management is an important accounting strategy that ensures organizations have enough cash to operate their business and meet short term debt obligations. An indicator of overall company health, liquidity and efficiency, working capital is a measure of current assets less current liabilities. This includes cash, inventory, accounts receivable, accounts payable, debts due within a year and other short term accounts.

If a company has a positive amount of working capital, it generally indicates it has enough easily liquidated assets to cover day-to-day operating expenses and short term liabilities. On the other hand, if a company has negative working capital, it may mean it does not have enough cash to pay off short term debts or it has an inefficient accounts receivables or payments process. Paying bills too quickly or collecting receivables too slowly can affect working capital management.

Improving Working Capital Management

As companies are increasingly tasked with doing more with less, an effective accounting strategy and adequate level of working capital is paramount. A strong working capital management program can help companies improve earnings, maintain growth, optimize inventory and attract investors.

There are several ways that companies can improve their working capital:

  • Use Technology: Technology and automation can help you significantly improve your working capital strategy. By leveraging electronic invoicing, automated matching and workflow management programs, companies can reduce invoice receipt-to-pay cycles and increase discount capture. These technologies can lower costs, eliminate inefficiencies, allow organizations to capture more discounts and bring invoice processing time from an average of 23 days down to just five.
  • Incorporate Discount Management: Effective discount management strategies benefit both buyers and suppliers of commercial goods. Buyers can obtain more discounts, better rates of return and improved supplier relationships, while suppliers enjoy greater cash flow, more predictable payments and less profit loss from unearned discounts.

Unfortunately, many companies struggle to capture discounts effectively. A recent study conducted by Direct Insite and PayStream Advisors found that only a quarter of accounts payable (AP) professionals can capture discounts consistently. Manual entry of paper invoices are the leading cause of this gap. These processes are costly and inefficient, and make it difficult for organizations to manage transactions effectively. An automated, e-invoicing solution can solve this problem and help organizations improve discount capture.

  • Leadership Support Across Departments: When implementing an effective working capital program, it’s important to involve leadership across departments, including customer support, HR, technical teams, financial staff and others. Many managers, especially those in non-finance functions, view cash flow management as a secondary priority. Some even perceive it in conflict with other priorities or goals specific to their division. However, optimizing cash flow will positively impact the organization as a whole and ensure the company can take advantage of timely opportunities to increase growth.
  • Focus on Long Term Picture: It’s relatively easy to obtain short term improvements in working capital by slowing down payments, speeding up collections or starving inventory. Long term results, on the other hand, require a concentrated effort and continuous process improvement. Companies that ignore working capital management and create short term or artificial fixes will struggle to improve working capital in the long haul.

Using technology is critical to an effective working capital program. By increasing accounts payable and accounts receivable automation and leveraging e-invoicing solutions, companies can increase efficiency, accuracy and effectiveness of working capital. The advantages will filter down to other business units and contribute to corporate growth.

Direct Insite’s PAYBOX® solution is the industry’s leading ePayments and invoicing automation technology. To find out more information about how PAYBOX® can improve working capital and streamline accounts payable and receivable processes, call us today at (631) 873-2909.

Working Capital Management