Is your working capital requirement “weighing down” your business plan? Don’t panic; there are different ways to optimize it. Here, the challenge is to control it and make it as weak as possible. To do this, you can act on three different items: customers, suppliers, and stocks. Here’s how to reduce the impact of working capital requirements in your business plan.
Reduce the Working Capital in your Business Plan by acting on Stocks
Your inventory is certainly the most important item in your business plan’s working capital requirement. If you carry on trading activity, the challenge is obviously to reduce this amount. To do this, you have several solutions: reduce your minimum stock, compress the turnaround time, etc.
First of all, you can influence the amount of inventory by setting a minimum stock (also known as alert stock – triggering an order for goods) that is not too large. At best, you should consider converting your procurement strategy to just-in-time.
Other levers exist and will also allow you to control your level of stocks. You may decide to accelerate the delivery process or sell your items faster (with promotions) to ensure that the rotation period of your stores is the shortest.
Reduce the Working Capital in your Business Plan by acting on Customers
You will likely get paid by your customers long after you pay your suppliers. And this plays against you in the calculation of the working capital in your business plan. In this case, you must act on the receivables. There are many levers at your disposal in this area. Here they are.
You can try to negotiate shorter payment terms with your customers. However, this solution has its limits since they require your customers’ agreement, who must also optimize the management of their WCR. You also have the possibility of encouraging your customers to pay faster than expected by setting up a system. Discount. Make sure, in this case, that your profitability is not too impacted.
The other strategy is to mobilize your receivables. In this type of operation, your customers do not know what you are doing. Several techniques exist, the best known being factoring. It consists of selling your trade receivables to a financing organization. The later releases the corresponding funds to you, from which he takes several commissions (service and financing in particular).
Reduce the Working Capital in your Business Plan by acting on Suppliers
Finally, the last area in which you can act to reduce the weight of working capital in your business plan concerns your suppliers. Here you find yourself in the opposite situation of the customers of your future business.
The challenge is, therefore, to negotiate the longest possible payment terms with your suppliers. To do this, highlight the volumes you are going to order. Ideally, you should pay your suppliers from the time you receive payment from your customers.
You can also optimize your ordering process so that new stocks don’t get to you too hastily. Also, do not use the early payment discount mechanism. This improves your profitability but degrades your working capital.