Monday, October 3

Tips for Improving Working Capital for Your Small Business

Working capital is fuel to your business. You cannot continue your business operations if it is not stable. Start-up companies often struggle with poor working capital, and the reason is obvious that their strategy lacks vitality.

A few changes to your cash flow system can free up some space. As an entrepreneur, you have an option of financing with working capital business loans, but sometimes you just need to be extra cautious, and things will go smoothly on their own.

How to bolster working capital for your business

First off, you need to examine your financial situation thoroughly. Check out cash coming in and going out. Do not include cash to be received as this is still not in your account. You cannot access it in case you need it. If you find it is not as flexible as it should be, you should immediately take specific steps.

Ask yourself the right questions

To improve your working capital, you should ask yourself if you can improve your business model to cut back on unnecessary expenses.

  • Is there any method to create a delay in payments?
  • Is there any way to leverage your assets to generate additional funds?

Investors warn start-up companies to take on debt for every little need. This is a great mistake you create in supplying cash to your business. It is not suggested that you cannot use loans, but you should try to opt for other methods to have sufficient working capital.

Shorten operating cycle

Your operating cycle starts when you start working on a project and ends when you receive payment for it. The longer the operating cycle, the poorer will be your cash flow. Therefore, it is suggested to shorten your operating cycle. Depending on your project, you can request the payments within a week or up to 15 days.

However, if the project takes a long time to complete, you should ask for an advance. This will help keep going until the final payment is made. Longer operating cycles are one of the reasons why you face problems with the cash flow system.

The business world is dynamic. You can require finances to meet any considerable expense. A rule of thumb states you should maintain sufficient cash to invest in that project. You may miss several opportunities if you do not have good cash flow management.

Speed up the collection process

Ask your accounting department to get a line on past due accounts. Contact to remind them their payments are due. Further, ask them what it is that is preventing them from making payments. It is vital to uncover if there are any issues because they will have an impact on your cash flow that leads to hindrance to your operations.

Keep sending reminders to speed up the collection process. In order to make them pay you sooner, you should offer them a rebate. However, this formula works better for those who pay their dues on time.

To prompt them not to delay the payment, you can give them a discount of 10%, so no outstanding accounts exist. Try to automate the process of sending them reminders about the collection. Keep them reminded that on-time payment can let them get additional discounts.

Charge late payment fees. Business is run with specific rules, not with emotions. Let your clients know that a default or late payments will attract penalties. Try to set high penalties so they pay on time. You will likely have more cash inflow if you align the receivables with payable. Set collection timings so that you receive money by the time your payables are due.

Increase sales revenues

Though there are various methods to improve your working capital, chances are they all do not give the desired results. Then, you will need to brainstorm ideas for taking sales graphs up. The higher the sales, the higher the revenues will be.

However, this works well when your operation expenses do not increase significantly. Check your pricing to see if you are charging enough to cover the total cost while keeping your margin.

If your operating cost has recently increased, you will have to increase the prices of your products and services. However, your prices must be affordable.

You cannot charge more than your competitors. Try to explore new marketing channels so more and more people know about your business. This will help improve visibility which in turn contributes to your sales, and improved sales mean improved profits, resulting in smooth cash flow. However, at the same time, you need to find ways to whittle down the operation cost.

Limit unnecessary expenses

You will have to examine your budget to see how much is going out. Get your statement from the accountant and carefully evaluate if you are spending on unnecessary things. The cash flow system will improve if you try to cut back on your operation overheads.

The central area to focus on is the bills that you incur to run your office. If your cash flow management is still poor, you should take rigorous steps. For instance, you can offer work from home option to your employees, of course, if it is possible.

This will help save money on rent or building maintenance and energy bills. You may not be comfortable with this idea, even if it is possible, but this will help save money significantly. Consult a financial planner who can guide you on ways to cut back on your operation overheads.

The bottom line

Working capital is always a concern for businesses, especially for start-ups. To improve working capital, you need to analyse the exact cause of poor cash flow management. They could be many, from unnecessary expenses to unpaid invoices.

You should make a list of those causes and then brainstorm how you can fix the issues. For instance, you should speed up the collection process, improve your sales, and shorten the operating cycle. If you still need money, you can take the help of a lender to hit the ground running.

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