HOW TO REDUCE WORKING CAPITAL REQUIREMENTS 2: Manage your inventory

Working Capital funds the cost of the labor & materials that go into the goods you sell or the services you render (i.e., your Cost of Goods Sold or Cost of Sales) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses). In most businesses (specially where goods are produced), the greater portion of Working Capital goes into Cost of Goods Sold.

If you are not able to sell your products (i.e., they remain in inventory), you put pressure on your Working Capital. You will need more cash (i.e., Working Capital) to pay for your operating expenses or to produce more goods to sell. It is important to know exactly how many days it takes to unload your inventory (i.e., sell your products) and recover the cash (i.e., your Cost of Goods Sold) tied up in your inventory. You have to know how long it takes to order your raw materials, have them delivered, and turned into products for sale. While you do not want to be in an out-of-stock position (thus, lost sales opportunities), you also do not want to let your Working Capital (i.e., your Cost of Goods) sleep in your storeroom.

A well-managed inventory leads to less Working Capital needed.

image from Microsoft Clipart