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Working capital is the backbone of any business, so learning how to maintain or generate more cash in your company is vital to success.
By improving the way you manage working capital, you can minimize the number of external investments and loans you accumulate during a fiscal year. Then, you can squeeze extra funds from your firm by maximizing your key drivers of cash flow.
1. Never Finance Fixed Assets using Working Capital
If you have used up all your cash then your business will look riskier to financial institutions and potential business partners. Financing fixed assets such as equipment with working capital also reduces your daily, weekly or monthly spending threshold. So, instead of depleting your working capital, use long-term loans to pay for financing fixed assets.
2. Limit Unnecessary Expenses
Apply transparency and clarity when it comes to how much you spend. This begins with examining your budget and breaking it down to its components. Make sure you’re not overspending in any area of your business. Set rules to restrict any unnecessary spending. You may also want to examine your office and business trip expenses if you’d like to free up some capital. Focus on the bills that maintain your functionality as a company. Small amounts of non-essential cash spending could instead be used to further fuel your working capital.
3. Make a Personal Investment
Another option for business owners is to make personal investments to increase working capital. You’ll first need to do a cost/benefit analysis to see what return you will get on your investment. This is a viable strategy if you see that the payoff in your business outweighs personal losses.
4. Avoid Stockpiling
Imagine your inventory as stacks of dollar bills. Every unsold item in your warehouse is essentially a pile of money sitting on the shelf, not being put to use. This decreased liquidity makes your business less agile and less competitive. To ensure maximum cash flow, you have to time your supplies and products to arrive exactly when you need them. By quickly converting inventory into cash, you’ll have less capital tied up. Another benefit is that you’ll need less storage space, which will also cut some additional costs.
5. Increase Sales Revenue
This way to increase your funds may seem obvious, but more and bigger sales equal increased revenue. Focus on expanding your sales force and exploring new marketing channels. Base you’re pricing on profit margins and sales to ensure your rates are reasonable and workable.
Keep in mind that, depending on your business cycle, profits from revenues may not come in time to keep up with the bills. If this is the case for you, don’t forget to work on also decreasing costs.
6. Don’t wait until the end of the Month
Collecting payments from customers faster is an obvious route to keeping more working capital in your company. Still, Fry believes it’s important not to put your rapport with clients in jeopardy. You need to keep your clients happy and attract sales, but at the same time, ensure that you’re not footing the client bill too long. To help protect you from late payments, he recommends billing as early as possible. You don’t have to wait until the end of the month. That’s a common fallacy. You need to generate an invoice as soon as the goods or services are delivered.
7. Fast Track your Payment Collections
The best way to keep your working capital funds ready and steady is to ensure that you are collecting your payments the moment they are cleared. Don’t wait till the end of the month to bill your clients, generate your invoices as soon as the goods or services delivery is confirmed. Billing early also ensures early clearance and hence an early top-up of your working capital.
Here are some of the things you can do to effectively manage your working capital:
Manage your Inventory
When you are selling physical goods, a simple inventory management technique i.e. to balance your demand and supply can help you save more cash. Needless to say, this cash then becomes a part of your working capital.
Prudent accounting can also ensure that you never run out of working capital resources. Once again keep a track of accounts payables and accounts receivables to keep your books up-to-date. Lagging behind in collections and payments often causes problems later on.
Do a monthly analysis of your inventory turnover ratio and bill collection ratio to optimise your business operations and establish a cycle. This will help you in anticipating the expenses in advance and allow you to keep cash at hand when the need arises.
Apply for a Working Capital Loan
A short-term business loan is the easiest way to get ready cash for day to day operations. Working capital finance frees-up your capital for investment in equipment and site while you repay the loan amount in flexible monthly installments.