Working capital is a strong indicator of a company’s health. A good business owner knows that to achieve a solid balance between liquidity, profitability, and growth, strong management of the working capital is vital. Being utilized for the daily operations of a company, working capital is often deemed the metric for how financially stable and how efficiently the operations are run in a short-term manner.
But while it is utilized for a company’s current and short-term obligations, it is the key to your long-term growth. It can even help you streamline your processes, reduce business costs, and minimize dependence on outside funding. However, improving working capital can be taxing even for seasoned business owners. To ease some of that burden, we’ve gathered four simple yet effective strategies on how you can improve your working capital.
1. Pay invoices faster
Accumulating money from unpaid invoices is one of the biggest mistakes small businesses make. Not paying your invoices in time can hurt your business’s overall operating cycle. Look into your invoicing process to find out what is the norm. And from these, you can execute a strategy on how to minimize the time between completing the invoices and the send out.
Some strategies you can begin with are arranging the billing once a product or service is delivered or completed, establishing late payment fees, giving incentives for early payments, and automating the billing process itself. Come up with strategies that will suit the type of your business and your current financial situation. Keep in mind that the goal here is to have shorter operating cycles. If you delay your invoicing, you will likely end up with poor liquidity and experience a loss of income.
2. Utilize data analytics
The industry has quickly shifted to data-driven decision-making and business management. The reason is pretty simple: numbers are a reliable basis. Accessing different kinds of financing opportunities for your business will also be easier if you got the data to support your promises. For instance, ventures such as partnering with an oil company or getting a business loan can be more possible if you have the data to back up your claims.
But apart from opportunities, data analytics can streamline the management of working capital, review of operations, compliance monitoring, and the creation of reports. It enables you to better look into your operations and if they still match your financing goals. But before you can gauge whether something requires recalibration, you need to identify the right metrics. Have your audit team gather up-to-date data so you can have a clear sight of the business opportunities and challenges ahead of you.
3. Review your accounts receivable
One important asset in any balance sheet is the accounts receivable. It’s much like the reflection of the quality of your products and services and the satisfaction of your customers. To run a critical analysis, begin by dealing with the best possible days sales outstanding (DSO), then compare it to your existing average. You’ll also need to determine why the DSOs are not where they are supposed to be.
Checking the top drivers of your revenue process is also helpful for analyzing your accounts receivable. These include your customers’ financial health, quality of your products, shipment patterns, as well as your credit policies. If customer payment lags are the only ones driving your account receivable, enhancing your service process might do the trick.
4. Reduce debt servicing expenses
This is most useful for startups and small businesses. The reality is, debt is usually unavoidable and, at times, an essential part of improving working capital. But if you’re drowning in debt, securing business financing can be tough. What you can do is to create a solid financial structure and determine whether you’re paying too much on interest. Overlooking details like interests and exorbitant penalties can negatively impact your cash flow real hard.
When obtaining financing or loans, always make sure to negotiate for lower rates and see if you can acquire a fixed rate with obligation charges. As you reduce your debt expenses, you’d also have to stop adding more loans to your company as you go along.
There’s a trust in working capital being a simply understandable concept. It revolves around getting money to cover your company’s daily expenses, bills, and other types of expenditures. But for you to get the best results for your business and sustain its continuous growth, managing and improving your working capital should be your primary concern.