How can working capital be effectively managed?

Effectively managing working capital ensures that a business can meet its short-term financial obligations and maintain sufficient liquidity to operate smoothly. Offering early settlement discounts to customers encourages prompt payment, which can enhance cash flow and reduce the time accounts receivable remain outstanding.

When customers take advantage of these discounts, it leads to quicker collection of cash, thereby improving the company's cash position. This can help in maintaining adequate working capital levels, enabling the business to pay suppliers on time, invest in stock, and cover operational expenses without the need for external financing.

The other options, while they may have some impact on overall financial management, do not specifically enhance cash flow and working capital in the same effective manner. Increasing fixed costs does not directly relate to improving cash flow; reducing employee hours could negatively impact productivity and service quality; and limiting marketing expenditures might hinder revenue generation rather than support cash flow improvements.