How to optimize cash flow with working capital management

Published on Oct 09, 2023

How to optimize cash flow with working capital management

Cash flow optimization is vital to any successful business – especially now as interest rates continue to rise. The key to ensuring positive cash flow is to effectively manage working capital, such as your company’s short-term assets and liabilities, including cash, inventory, and accounts payable and receivable. It is essential to manage these elements carefully to maintain sufficient cash flow, especially during periods of growth or economic uncertainty.

Balance assets & liabilities

First, it’s important to balance your short-term assets and liabilities in a way that maximizes cash flow. The cash conversion cycle, which is the process of converting a company’s investments in inventory and other assets into cash, includes the time it takes to sell inventory, collect payment from customers, and pay suppliers. By optimizing this cycle and shortening conversion times, a company can improve its cash flow and increase profitability.

Manage inventory

One of the primary ways to manage working capital effectively is through inventory management. Inventory represents a significant investment for most businesses and managing it effectively can help reduce expenses and free up cash. To effectively manage inventory, automate the tracking of inventory levels, optimize reorder points, and cut excess inventory. This can reduce the amount of cash tied up in inventory, free up space while decreasing the cost of paying for storage, and reduce the risk of product obsolescence.

Monitor accounts receivable & payable

Monitoring accounts receivable and payable is another effective strategy for optimizing cash flow. Managing accounts receivable involves monitoring payment terms and following up with customers who are slow to pay. By reducing the time it takes to collect payment from customers, a company can improve its cash flow and reduce the risk of bad debts. This may involve offering incentives for early payment, such as discounts or rewards.

Managing accounts payable involves negotiating favorable payment terms with suppliers and ensuring that payments are made on time. This can help improve cash flow by reducing the amount of cash tied up in accounts payable and avoiding late payment penalties.

Cash management & forecasting

Cash management involves monitoring cash balances, forecasting cash flow, and managing short-term investments. By managing cash effectively, companies can ensure that they have sufficient funds to meet their obligations – now and in the future – and take advantage of opportunities as they arise.

Consider a financial advisor

Working capital management is especially important for small and medium-sized enterprises, which often face cash flow challenges due to limited resources, expertise, and access to financing. In these cases, it may be beneficial to work with a financial advisor or consultant who can provide guidance and support in managing working capital.

Effective working capital management plays a critical role in cash flow optimization. By managing inventory, accounts receivable and payable, and cash effectively, companies can improve their cash flow, reduce costs, and increase profitability. By prioritizing working capital management, companies can improve their financial health and position themselves for long-term success.

At Valley, our financial experts have a wealth of experience in helping businesses like yours manage their working capital and optimize cash flow.


For informational/educational purposes only.  The information in this content is not advice on legal, tax, investment, accounting, regulatory, technology or other matters.  You should always consult your own financial, legal, tax, accounting or similar advisors before making any financial or investment decisions, or entering into any agreement for Valley products or services.  Copyright © 2023 Valley National Bank. All Rights Reserved.

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