Invoice Bazaar Blog

How Can Inventory Optimization Help SMEs in Working Capital Management?

By Invoice Bazaar | July 7, 2020

The funds available for managing the day-to-day affairs and operations of a business enterprise is called its working capital. It is equal to the difference between the organization’s current assets and its current liabilities.

The current assets consist of cash in hand, account receivables as well as inventories of raw materials and finished goods. Similarly, current liabilities comprise accounts payable. Good working capital management ensures that the current assets are kept consistently higher than current liabilities.

Working capital is considered the lifeblood of any business enterprise, and its efficient management improves the company’s earnings and profitability through optimum use of its resources, which includes proficient management of its inventory, accounts receivable and accounts payable.

Normally, banks and investors are skeptical when it comes to extending financial assistance to the entrepreneurs as many SMEs lack knowledge and discipline concerning accounting, inventory management and document management. This, in turn, makes the assessment of creditworthiness very difficult for the lenders.

Diligent accounting and business planning are the keys to efficient and proper inventory management. SMEs can easily avail working capital loans from banks by using inventories of raw materials and finished goods as collateral to back the loan against default.

Furthermore, inventory optimization can improve the availability of working capital with the concerned SME. That is because too little inventory raises reordering costs whereas carrying excess stock can increase accounts payable and thereby reduce cash in hand as well as working capital with the company.

There is also a concept called Just-In-Time inventory that allows your business to eliminate costs incurred on storing stock. This is done by purchasing and receiving raw materials at the right time for the production line or for sales. To manage this effectively, you need to cultivate and maintain an excellent relationship with your suppliers.

Furthermore, by making timely payments to suppliers and clearing their dues well on time, you can negotiate better deals and get massive discounts on your purchases. This, in turn, will increase your cash in hand as well as working capital.