Managing working capital is a crucial task for any business. The key parts are inventory management, accounts payable management, accounts receivable management and cash management. All terms known from previous post on cash flow.
Working capital represents the difference between current assets and current liabilities. It represents liquid funds available to day-to-day operations.
Current assets are those that can be converted into cash within 12 months, while current liabilities are obligations that need to be settled within the same period.
Cash itself is often a significant part of current assets. You don't want to hold excess cash reserves because that is a resource you could've employ productively elsewhere. Conversely, holding too little cash can leave you vulnerable in emergencies.
Make your model, hold enough and a little extra in savings account for emergencies and deploy the rest into productive investments.
Same can be said about inventory management. You want to order your material so they arrive precisely when you need them. You want to avoid excess storage costs. On the other hand, you need a buffer to maximize the value you get from shipping and to ensure you don't run out.
Similarly, for accounts payable (AP) and account receivable (AR), the goal will be to optimize payment terms. Ideally, you should negotiate longer payment terms for your invoices and shorter terms for invoices you issue to customers.
You should also track at least monthly your financial position - How much cash and inventory you have, how much are your outstanding accounts receivables and accounts payable.
Your accountant should help you here, create a management report for you to see how good is your position, how liquid you are. And they may even suggest improvements to enhance your working capital management.