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How To Manage Your Business Working Capital
Manage Your Business Working Capital
Managing your business’ working capital will help you prevent cash flow problems, improve your assets’ liquidity, and increase your return of investment, among many things. Properly done, it will spur your company’s growth, leading to inevitable success.
However, business working capital management is easier said than done. There is a lot of information to take into consideration. You might not know where to start! So, to make your life easier,
Here Are Steps That Will Help You Become A Good Steward For Your Company’s Finances.
Minimize Your Inventory to Help Your Working Capital
Having your own inventory is considered as an asset by many entrepreneurs. But if you want to free up your company’s cash flow and enjoy better net working capital, you need to optimize it. That means increasing inventory turnover cycles, avoiding stockpiling and reducing slow-moving inventories altogether.
To minimize your inventory, most high performing businesses recommend relying on pull inventory methods like drop-shipping and the just-in-time strategy. These techniques usually involve buying the products (or the materials needed to manufacture it) based on demand. In short, you have to get the goods after your customers have ordered it. This will help significantly reduce your company’s expenses, ensuring your working capital is properly utilized.
At the same time, you need to boost your business’ inventory turnover cycles or days inventory outstanding (DIO) if you want to properly manage your working capital. This means minimizing the days you hold a product before selling it to a customer. To achieve this, you need to constantly measure the turnover rates, compare it to your competitors’, and introduce techniques to minimize DIO.
Switch to Electronic Payment Systems
To effectively manage your business working capital, you need to be able to send out invoices quickly. By introducing an electronic payment system to your company, you can achieve that plus more.
Converting to electronic payables and receivables comes with numerous benefits. For instance, it gets rid of the inefficiency caused by manual processing, lost receipts, and high invoice demands. Also, electronic payment systems can be automated, allowing you to send invoices more promptly. As an added bonus, this opens opportunities for your business to get more favorable capital payment terms and other perks.
Improve Your Collection Processes
Collecting invoices is vital for maintaining your cash flow and shortening your working capital cycle. Unfortunately, this is also a process in which every business runs into snags or delays. It’s not uncommon for customers and clients to try and delay payments as they try to manage their own cash flows.
A good collection process can give your working capital cycle a significant boost. It guarantees that most, if not all, of your pending invoices get paid within the term set by the agreements with your customers. A clear collection system also ensures that invoices are assigned to the right specialist, i.e. overdue accounts must go to collectors that specialize on collecting late payments.
Take a look at your existing collection workflow and see if there are segments that need to be improved. Try to check if there is a clear schedule of reminders and actions that should be taken as the customer’s due date approaches. Make sure everyone is on the same page with regards to collection goals, and how important the process is to the business.
Introduce New Payment Options for your Customers
If you’ve stuck to only one payment option for your clients or customers, you’re shooting yourself in the foot. In this age, digital solutions now exist for processing payments in addition to traditional check or cash payments to the bank. Your business should be leveraging these digital solutions because they have long-term benefits to offer.
One of these advantages is convenience. Digital wallets, for instance, provide a means for both consumers and businesses to settle obligations without having to meet. Both parties just need an account at these e-wallets so they can send and receive funds with one another. Transactions are instantaneous, eliminating the usual processing time in traditional payment methods.
Making multiple payment options available for your customers can also potentially speed up the collection process. They also reduce stress on both your collection teams and the client. With the instant receipt of funds made possible by digital wallets, for instance, customers have almost zero excuses for late payments.
Pay Lenders and Suppliers on Time to Help Your Working Capital
Paying vendors on time is another great way to efficiently handle your working capital. Not only does it ensure proper cash flow, but it also allows you to instill discipline in your business whenever it makes payments. Additionally, it makes suppliers feel more at ease with your company, thus making them more flexible when it comes to discussing prices and contract terms.
So assess your payment terms with your supplier or debtor, and check the agreed-upon window for paying for their goods and services. If the time frame seems too long, then you might want to discuss it with them so you can shorten it. Just make sure the payments you make stays within your company’s budget. Simultaneously, you can reduce potential bad debts by implementing rigorous credit control procedures in your business.
Making sure that all your payments to lenders and suppliers are on time will also improve your credit score tremendously. A good credit score gives you access to more financing options. A positive standing will make sure that you can obtain financial assistance anytime the need arises.
Get Adequate Financial Assistance
Business loans can help you improve your business’ working capital management in several ways. For example, short-term loans can help give your company a financial boost in case its cash flow is acting up. While this is essentially a band-aid solution, it will fund your operations long enough for you to fix your current financial issues.
Or you can opt for long-term business loans to acquire fixed assets and stabilize your company’s cash flow. You can then use the recently fixed cash flow to repay the loans and any other unsettled expenditures. This will ultimately lead to better relationships with lenders, allowing you to get more flexible terms in the future.
Alternatively, you can consider talking to alternative lenders. Unlike banks, these debtors tend to offer more generous deals for their financial services. Depending on where you go, you could end up enjoying more money borrowed, less interest, and generous repayment terms. For instance, you could receive a cash advance against your pending invoices by entering into a accounts receivable factoring agreement with a lender.
Control Your Expenses Carefully
Last but not least, learn how to monitor and curb your company’s expenditures. To diligently track your business’ expenses, you need to gather as much data as you can about your historic costs. That way, you’ll be able to make a plan to reduce future expenditures.
You should also manage your business’ variable costs. You can do this by taking a look at your company’s previous variable expenses and calculating how much they contribute to the overall expenditures. Then set budgets for each of these expenses and implement it during the following months. If you’re running a large company, then you shouldn’t ignore small expenses. Despite their size, they can easily accumulate and affect your working capital.
You might also want to think about setting up dashboards. Dashboards allow you to take a snapshot of a specific group of data with just a click of a mouse. You could take advantage of this capability to gain an overview of your business’ cash flow anytime you need to. These software solutions help you make informed decisions when it comes to managing your cash flow and working capital.
Learn How to Manage Your Working Capital
Through proper business working capital management, you can ensure your company’s financial health, maximize its operational efficiency, and improve its profitability. An optimized working capital cycle, together with cash flow, is key to ensuring your business’ survival amidst a very competitive landscape. The tips outlined above should help in improving your working capital cycle.