Improving Your Business’ Working Capital in 6 Steps
If you’re trying to improve your cash flow management, working capital is the key. Many new business owners don’t realize it, but there are key strategies to managing this precious resource that produce predictable, positive results. By putting them into place in your business, you can get the capital you need to take on new projects, manage your expenses better, and even increase your reserve funds.
The first step to creating this kind of well-managed financial atmosphere is improving your accounts receivable collections. Tightening your customers’ payment windows means getting your money faster, and that allows you to put it to use as capital when another customer places an order. It also helps you make sure you’re always ready to meet your outgoing expenses, so your credit score stays high and your vendors stay happy.
It’s also important to do what you can to improve your accounts payable if you need working capital. Negotiating longer payment windows with vendors or finding suppliers who offer you better deals at your current purchasing volume will mean providing your company with more actual working cash by changing the timing and size of your outgoing expenses.
On to step three: reducing expenses. It’s not fun, but you do need to find ways to trim costs. Sometimes that means a leaner labor force, less company-sponsored perks, or just cutting down on paper and other office supplies. It’s not easy to know where you can reduce, but it’s important to study the problem and do what you can. Fourth, you need to segment and analyze your debt your customers according to credit risk. This allows you to offer customers who pay consistently and on-time preferential pricing or longer payment windows, and it also ensures you’re dedicating the resources to collecting from high-risk customers.
That leaves just two more steps to raising your working capital. The fifth step is a good idea for any company to periodically do, and that is a review of tax opportunities for your business. By rearranging your financing and other costs, you can often take advantage of opportunities to reduce your tax burden. Finally, the sixth step is improving your credit resources. For companies with a lot of invoiced accounts in rotation, accounts receivable financing can be a great option. This allows you to finance the invoices of your higher-risk segment of customers and outsource the collection of their debt to another company, while accessing the money today. It’s a key to building working cash for many companies, and you should consider it for your business.