Which management practice can enhance working capital efficiency?

Enhancing working capital efficiency is essential for ensuring that a business has enough liquidity to meet its short-term obligations while also enabling growth. One effective management practice for achieving this is speeding up accounts receivable collection.

When a company accelerates the collection of accounts receivable, it improves cash flow by reducing the time that money is tied up in unpaid invoices. Faster collection means that cash is available sooner to be used for other operational needs, investments, or to pay off liabilities. This practice directly contributes to improving the working capital cycle, allowing the business to operate more efficiently and respond quickly to opportunities or challenges.

In contrast, overstocking inventory ties up cash in goods that may not sell quickly, which negatively impacts liquidity. Increasing payment terms to suppliers may temporarily improve cash flow but can strain supplier relationships and potentially affect future negotiations. Reducing cash reserves could jeopardize the company's ability to handle unexpected expenses or seize investment opportunities, and it may lead to a liquidity crisis. Therefore, speeding up accounts receivable collection stands out as a strategic approach to enhancing working capital efficiency.