Sample interview questions: How do you evaluate and optimize financial performance through working capital management strategies?
Sample answer:
Assessing working capital performance:
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Calculate working capital metrics: Current ratio, quick ratio, cash conversion cycle, inventory turnover ratio, and days sales outstanding (DSO) are some key metrics used to evaluate the efficiency of working capital management. These metrics provide insights into a company’s short-term liquidity, efficiency in converting assets into cash, and effectiveness in managing receivables.
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Benchmark performance: Compare your company’s working capital metrics against industry benchmarks or historical data to identify areas for improvement. Benchmarking helps set realistic goals and track progress over time.
Optimizing working capital management:
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Managing inventory levels: Implement inventory control systems to keep inventory levels low while ensuring sufficient stock to meet demand. This reduces the risk of obsolete inventory and minimizes carrying costs.
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Shortening the cash conversion cycle: Accelerate cash inflows by offering early payment discounts, improving billing and collection processes, and negotiating favorable payment terms with suppliers. Delay cash outflows by extending payment terms with suppliers and optimizing accounts payable processes.
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Improving receivables management: Establish clear credit policies, implement effective credit checks, and offer flexible payment options to customers. Monitor customer payment patterns and take prompt action to … Read full answer