Managing your business’ working capital will help you prevent cash flow problems, improve your assets’ liquidity, and increase your return on 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. So to make your life easier, here are steps that will help you become a good steward of your company’s finances.
Minimize Your Inventory
Having your own inventory is considered 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 dropshipping and the just-in-time strategy. These techniques usually involve buying the products (or the materials needed to manufacture them) based on demand. In short, you have to get the goods after your customers have ordered them. 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 of 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 them to your competitors, and introduce techniques to minimize DIO.
Switch to Electronic Payment Systems
To effectively manage your business’s 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.
Pay Lenders and Suppliers on Time
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 stay within your company’s budget. Simultaneously, you can reduce potential bad debts by implementing rigorous credit control procedures in your business.
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.
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’s 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 them 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.
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. So better apply the tips mentioned above as you run your business.