Working capital is integral to the financial structure of any business. Carefully monitoring it is what can differentiate between the success and insolvency of your business.
You can measure the amount of working capital by subtracting your current liabilities from your current assets. Only then can you tell if you have enough liquid assets to meet your financial obligations.
Your business can only excel if you manage and improve your working capital. Failure results in added stress and inefficient business operations. Therefore, make it a priority to monitor your company’s financial health and improve your working capital.
But how do you go about it? You don’t need a Ph.D. in economics to keep track of your cash flow. But these tips can help you manage your working capital like a real boss.
- Manage Your Inventory
There are both advantages and disadvantages to having a large inventory. It increases your current assets, which is a plus, but it can at the same time become a liability if you cannot sell.
Too much inventory holds your capital and leads to more expenses in form of storage costs. A lack of enough inventory also makes you lose out on an opportunity to make a sale. Carefully monitor your inventory levels to avoid ending up with either extreme.
Also, forecasting your demand can further help as you can determine how much inventory you need without having to tie up your working capital. Set a trigger to only re-order more stock when they hit base level.
- Re-Asses your Payments and Manage your Debtors
For healthy working capital, money should stream into your business on time or early if possible. You can only achieve this by shortening the sales to cash cycles by enacting a strong collection process.
Send out your invoices as early as possible and re-consider the timeline of payments. While the normal payment period is in 30 days, you can still ask for payment within 15 days. Only then can you avoid your capital from being invested in account receivables.
You can also negotiate for better payment terms with your business suppliers. The primary goal is to increase the amount of money streaming into your business, but also delaying the money going out.
- Make your payments on Time
Having payment discipline is crucial for your long-term growth. It generates good-will and earns you a strong reputation that is important while doing business. It will help you negotiate for better deals in the future with other businesses.
Unless it is absolutely necessary, never delay payments to your suppliers. And if you do, always inform your suppliers on time for them to expect the delay.
Making payments to your suppliers early is a short-term measure to controlling your capital. Still, the results have massive long-term consequences.
Today, technology makes it easier to transform once manual tasks such as creating invoices in settling payments into automated transactions. Now you can send money to Singapore online and timely to help you build a respectful relationship with your suppliers.
Managing your working capital requires both time and effort, but it is important for the growth of your small business. It involves knowing how to manage your business expenses so you can have enough working cash flow.
It’s hard to manage your working capital if you have limited personnel. Avoid taking extreme measures such as payroll cutting, dumping inventory, or aggressive debt collections to get yourself out of a fix.
Always consider the effects of your decisions as they have a long-term impact on your business.