Working capital will represent the money your business has in order to meet its daily operational expenses. It is otherwise known as the amount of cash you have in your firm’s pocket. To ensure that your enterprise will meet its obligations and evade bankruptcy, effective working capital management is crucial.
Too much working capital may lead to decreased shareholder value and profits, while too little working capital can lead to bankruptcy. Financial experts share some ways to manage as well as to improve your working capital.
1. Reduce Fixed Costs
Examine all your fixed costs, including utilities, rent, employee costs, and office supplies. By doing this regularly, you will most likely find areas where you can lower costs. If you lower fixed costs, you will have an increase in your working capital.
For instance, you should keep the heat down by several degrees in the winter or keep fewer office supplies on hand.
2. Enhance Accounts Receivable Collections
You need to make sure that accounts receivables are being collected on time. By offering fast payment incentives, you can actually encourage your clients to pay early or on time. If you have a collections team, you can motivate them with internal programs offering incentives to collect invoices within the outstanding invoice payment terms.
3. Boost Accounts Payable
You must negotiate better payment terms with distributors and materials suppliers. If it’s non-negotiable, consider replacing them with new distributors and suppliers. Moreover, you have to enhance the management of the payment process. Review the payment terms on your accounts payable and accounts receivable. It is vital for you to balance these terms to make sure that your company has the most favorable cash flow position.
4. Analyze for Credit Risk
It is crucial for you to analyze your customers and separate them by their likelihood to repay you on time. This can reduce collections as well as improve your cash flow.
You must also do this analysis for your distributors. By adjusting credit profiles and terms or perhaps adding incentives or penalties, credit risks can significantly be reduced.
5. Introduce Corporate Credit Card Payment Options
Though you may need to pay a certain percentage to the credit card company, using a corporate credit card will help your business gain a working capital faster. Before applying for it, you must weigh the pros of having easier and faster working capital against the cons of paying a certain fee for the privilege.
The right credit card will make all the difference to a profitable business. It allows you to manage costs with just a single statement, regardless of how many cardholders there are. Also, it is easier to set limits on spending so you will have more control if you are planning a budget.
Moreover, the use of a reliable corporate credit card will give you breathing space to plan new business enterprises, pay suppliers on time, and meet unexpected costs that come inevitably as you engage in new markets.
Some cards also offer special features and rewards. Thus, make sure that you choose a credit card that has the right supporting tools for your business. Speak with the best business bank about which credit card is right for your company.
6. Consider Alternative Financing Methods
Today, most businesses are looking into alternative financing and using them to improve their cash flow. Below are some of the best alternative financing methods you can use as well.
Invoice factoring is the selling of invoices to a third party company in order to improve your cash flow and minimize bad debt. If you choose to use invoice factoring, you will benefit from an instant boost to your cash flow. At the same time, the need to process invoices will be eliminated.
A bank guarantee is a promise from lending institutions like banks that when a certain borrower defaults on a loan, the financial institution will cover the loss. It allows your company to make purchases that you normally can’t make, and serves to expand and heighten business activity.
Letter of Credit
A letter of credit is a document issued by a bank guaranteeing that the buyer will pay the seller fully on time. If the buyer was not able to make the payment, the bank is required to cover the remaining or full amount of the purchase. The use of this alternative financing method has become a crucial aspect of international trade because of the nature of international dealings.
Working capital is the backbone of any business type. Thus, learning how to maintain and improve more cash in your business is crucial for success. Keeping enough working capital on hand is challenging so you need to know the basics. Make sure that your company gets paid for the products or services you provide. Also, consider the different options above and put your business finances to good use.