Your businessí operational efficiency and financial health are dependent on your working capital and how well you manage it. Your short-term profitability as well as the strategic moves you can make also heavily depend on the working capital. Essentially, managing your businessí working capital involves managing your inventory as well as accounts receivables and payables. If you can ace this, it allows your business to stay agile. Hereís how to do so:
1. Donít delay collections and payments
Your accounts receivables and payables are integral to the amount of working capital because essentially,working capital is the difference between current assets and current liabilities. Have clear credit terms with your customers and donít delay collecting payments. You should not delay sending invoices and billing your customers and at the same time, you should not delay making payments either. That could lead to late fees and extra expenses.
2. Consult an expert
While reducing unnecessary expenses seems like a simple way to efficiently manage your working capital, putting this into action can be tricky. Seeking expert advice can help you understand where you can afford to cut expenses. Additionally, a consultant can also help you identify where you can generate more cash flow and can provide inventory management tips.
3. Consider a working capital loan
Sometimes it may be necessary to look into business working capital loans. You can think of it as an investment to grow your business. For instance, if you get a big new order but donít have enough working capital for the required inventory, you can take out a working capital loan to fund it. In this way, working capital loans can help meet short-term business needs.
4. Avoid overstocking
An important thing to take care of to stay agile is inventory management. Inventory ties up your working capital and takes away liquidity from your business. Hence, itís essential to avoid overstocking and forecast demand during different times of the year. This way only the absolute required working capital amount goes towards the inventory and you have the maximum of it left for other operational expenses.
5. Donít buy fixed assets
Working capital is not ideal for buying fixed assets. Thatís because the primary purpose of working capital is to fund short-term expenses of the business and convert inventory to cash again for a healthy cash flow. For investing in fixed assets, you can consider long-term loans or term loans. They are better suited for purposes such as buying machinery.
6. Focus on sales revenue
Another way, and a more direct one, of increasing your working capital is to increase your sales revenue. You can see whether you can enhance your marketing strategies, lower your customer acquisition cost, tap into newer markets, etc. You can also look at refinancing your fixed assets such as equipment. This essentially means that you get a significant amount of credit against a fixed asset and hence increase your working capital.
If you have healthy working capital, your business will remain agile and financially sound. It will also be in a position to explore time-sensitive opportunities that present themselves with the changing business environment. Hence, whether it is through business working capital loans, better inventory management, increasing sales revenue or consulting an expert, your focus should be on having sufficient working capital at any given time.