Now is the ideal moment to properly analyze your company’s financial structure. One of the most significant aspects of running your own business is knowing where to find finance and how to manage your working capital. By addressing these basic requirements, you will be able to readily assess the progress of your firm.

Working capital, also known as Net Working Capital (NWC), is the amount of cash in your company’s pocket and a measure of its ability to meet financial obligations. As a result, running low on working capital will not only increase your stress but will also cause inefficiencies in your business operations.

Wages, accounts payable, facility expenses, and supplier payments can all be met more efficiently when your company’s working capital is properly monitored and managed. This is why firms that flourish in their respective industries are constantly looking for strategies to manage and improve their working capital position. By maintaining appropriate working capital, you send a message that your company is well-managed, which can earn the trust of stakeholders and meet the expectations of investors and shareholders.

With that, here are the 12 things you can do to boost your working capital:

1. Keep your net working capital ratio in check

Set your goal to get a good NWC ratio. You can calculate your working capital ratio using the same numbers you used in your NWC with this formula: working capital ratio = current assets / current liabilities.

Getting a  1.0 or less quotient in your working capital ratio means that you are making use of all your working capital resources — which leaves you with no room for adjustment. This becomes a problem when a client fails to pay you on time and when some other unexpected expense comes up.

On the other hand, getting a 2.0 or higher quotient could mean that you’re not making the most of your resources on hand. You might need to re-evaluate your budget and see if you can invest in new equipment or spend on more aggressive marketing, which will actually help your business grow or gain an edge over your competition.

Some businesses overlook their working capital ratio because they just see it as additional work, but for any serious business that wants to establish trust with its shareholders and secure additional funding for future growth, having a stellar working capital ratio is important. 

The ratio determines the effectiveness of your business’s growth plan and whether your business has enough short-term assets to pay off its short-term debt. It also provides a measurable basis to secure business financing by reflecting the efficient handling of your business’s resources. 

2. Improve your inventory management

Your business assets include your inventory aside from your working capital. How you manage your inventory can also impact your working capital. Your inventory consists of items that are held for sale, items that are being prepared for sale, and items used in the production process.

The inventory is one of the things being checked by investors and shareholders to determine the operational efficiency and viability of your business. High liquidity of your current assets could reflect insufficiency in product demand. On the other hand, a large inventory may decrease your business’s current assets due to unnecessary expenses and waste such as an increase in warehousing costs.

According to the findings of the 2016 US Working Capital Survey, companies should reduce their inventory to improve business financing by maintaining cash reserves. However, some experts claim that it does not work for all businesses. Efficient inventory management is still seen to be the most effective way to optimize your working capital.

It is advisable to invest in digitizing your inventory management to help you optimize your inventory by tracking orders, deliveries, and sales. This saves you from overstocking and inventory shortage. It may be expensive, but it can increase business efficiency in the long run. Digitized inventory management can minimize losses and business interruptions through an effective warehouse organization.

3. Manage expenses better to improve cash flow

Cash flow is the ultimate value driver in any business. With this, your working capital is highly affected when assets are tied up in things like inventory or unpaid invoices. In business financing, having negative cash often scares investors and shareholders away and this can result in undervaluation of a business if not remedied. In the worst cases, businesses become unable to pay their bills and may be forced out of business.

Pay attention to your cash flow and compare it with your expenses such as bills and equipment purchases. Often, heavy equipment purchases and lags between providing services and receiving payment cause a major strain in business cash flow. 

Find out if there are areas where costs can be further reduced. Start by going through all of your monthly subscriptions. That way, you can identify which expenses are wasteful and which expenses you have to eliminate in order to increase the liquidity of your working capital. You have to take note, though, that cost-cutting without considering the real needs and demands of your employees, customers, and partner vendors may produce short-term benefits, but with poor long-term results. 

4. Automate processes for your business financing

Manually handling your business financing processes is labor-intensive, inefficient, and error-prone. It requires you to hire people who specialize in a certain aspect of your business. Hiring specialists proves helpful for your business to thrive as specialists have keener eyes for small details you might overlook. However, it becomes tricky when your key employees suddenly quit — you need to hire and train new people to transfer their knowledge about manual handling.

Read Also: Industry Insights: Working Capital Trends and Best Practices in Financial Management

Automate your accounts to eliminate expensive labor costs and errors. While manual management can add cause to delays in getting paid, automation saves money in the long run and reflects up-to-date business financing processes in your business. 

This may require you to outsource a strong collection team, which could mean giving up a degree of control and visibility. You will be able to track cash inflows and outflows with ease and your outsourced team can provide your customers with a digital platform for invoices and payments. However, you’ll become more dependent on them as you no longer control how they handle your account processes.

5. Incentivize receivables

As a business owner, you have to also establish working relationships with your customers, suppliers, and vendors, among others to ensure that your business doesn’t suffer from unreliable people who do not promptly fulfill their obligations.

Having your business accounts automated can help you by determining the customers who pay on time. Give incentives to these kinds of customers to encourage them more into meet their payment obligations. This will not only allow you to establish a good rapport with your customers but will also help you hold a good capital position.

Proper monitoring and investigation are key to keeping your accounts up-to-date. Balance the assessment of your customers’ creditworthiness to protect your business from being vulnerable to negative cash flow and bad debts.

6. Establish a penalty for late payments

As much as you incentivize timely fulfillment of payment obligations, you also have to establish a penalty for late-paying customers. This move sends out a message to your customers that they should meet their payment obligations punctually. This also allows you to get invoices paid faster. 

While penalties can add to your collectibles, it also serve as a mitigating factor for customers who pay late. Prior to implementation, ensure that your customers are completely on board with your policies such as imposing late fees. If not, imposing penalties for late payments may also jeopardize your working relationship with your customers, which may result in your business not achieving its desired outcomes.

7. Work with vendors who offer good deals and discounts

Establishing a good working relationship with your vendors will not only help you get special deals and discounts but will also help you earn your vendor’s trust. When the time comes that your business faces a cash flow crunch, your relationship will go a long way in receiving some leniency.

Take advantage of early payments as an opportunity to negotiate about getting discounts. This way, not only will you have a good standing for your payables, but will also save you some expenses that could help you pay debts and grow your working capital.

Just make sure to keep up with your suppliers’ terms and conditions to avoid hurting your finances and credit standing in the long run. Failing to do so would make it difficult or even impossible to get business financing for growth or, worse, during an emergency.

8. Track your business performance with data analytics

Most businesses are now transitioning to data-driven business management and decision-making because numbers provide amore reliable basis for business decisions. Looking for business financing opportunities would be much easier for you if you have enough data to back up your claims and promises to potential investors or loan providers.

Collecting data is just one of the processes of data analytics. Aside from having data, you have to make sense of the data you have to make it work for your business. 

One of the benefits of data analytics is that it eases up the management of your working capital, the creation of management reports, compliance monitoring across business departments, and the review of your operations. It allows you to have a more comprehensive review of how your business operations it is consistent with your business financing goals. Metrics should be customized to measure your milestones so you can gauge whether you are off or on target when it comes to your business goals.

In setting up data analytics for your business, it is important that you determine the right metrics that will allow you to properly gauge whether an aspect of your business needs recalibration. Poorly defined metrics and lag in real-time data can derail rather than help you achieve your goal. Make sure that your audit team collects up-to-date data to foresee the challenges and opportunities ahead of you.

9. Resolve disputes with customers and vendors

Business financing requires more than knowledge about money. Part of growing your working capital is the proper handling of relationships essential to your business. As you grow your business and transact with more people, the chance of a discrepancy occurring is always high so it is inevitable to have disputes.

Maintain your good rapport with customers, clients, and partners by resolving disputes quickly. There may be some cases that are likely brought to the court at some point, but as much as possible, it’s always better to avoid undue delay in resolving disputes to prevent unnecessary legal expenses.

When disputes aren’t quickly addressed, receivables are subject to the freeze, which is often a concern for many organizations. To avoid this, go through the policies and agreements of your customers and suppliers. Look for what’s missing, what isn’t clear, and where potential areas for conflict exist.

This requires more customer service legwork and training in addressing conflicts (i.e. getting involved with conflict resolution). In turn, the experience can give you the upper hand to healthily resolve conflicts in the future and it will save you money and your employees’ time, all of which deplete working capital.

10. Meet your debt obligations

The way you manage your debts can also affect your working capital position. Manual processing is often the reason why late or missing debt payments happen, hence the penalties. Some penalties seem harmless but when late payments become a regular habit due to mismanagement of debts, it will likely deplete your working capital in the long run.

Ensure that you pay your debts on time to avoid delays and penalties. Electronic payment systems can help manage your dues so that your payments are timely. That way, you can dodge the late fees and maintain your good credit score at the same time, which can put you in advantage when applying for loans in the future.

This works best when you limit your business to small amounts of debt only. Having a lot of debt makes it impossible to meet due dates on time. Considerable factors include delayed receivables and short payables cycle.

11. Reduce debt servicing expenses

For small businesses and startups, debt can be unavoidable as it is usually and initially an indispensable part of growing your working capital. However, make it part of your business goal to establish a better financial structure so that it is much easier for you to secure business financing when needed.

Analyze your capability to secure business financing and examine whether you’re paying too much on interest with your existing ones. The way you manage your financial obligations has an immediate impact on your working capital as this can also turn your cash flow to zero if you overlook details such as exorbitant penalties and interests when you settle your loans.

Know the business financing options available to you and learn to always look at the fine prints on each business financing opportunity being offered to you. When securing business financing, negotiate better rates and lower interest rates. Try to get a fixed-rate line of credit without any origination fees.  

Locally, First Circle is among the reliable business financing firms that can provide working capital fixes. We offer business loans with interest rates that are tailor-fit to your company’s profile and business needs.

Meanwhile, a sound business financing plan requires you to take loans only when needed. It is dangerous to develop the habit of taking out additional loans just because you want to capitalize on low-interest rates. Taking care of a pile of loans can increase the likelihood of your business incurring penalties due to mismanagement of debts because of late or missed payments.

12. Segment and analyze your customers for credit risk

Automating your business’ billing process and providing an online payment portal can give you the edge in business financing by making data collection from your transactions programmed. Data can help you identify your customers and segment them by their likelihood to repay you. This allows you to optimize your collections and improve cash flow in the long run. You can also do this to your distributors so you can analyze whether they are likely to sell to customers that don’t pay.

Complement your analysis by adjusting your customers’ and vendors’ credit profiles and terms or adding penalties and incentives. As previously discussed, incentivizing receivables and establishing penalties could make room for on-time payments and more cash inflows.

This allows you to create projections of how likely your customers will miss payments. This way, you would know who among them you are more comfortable continuing to do business with in order to avoid disputes in the long run. However, do all these with proper metrics and sound collection policies to prevent personal bias from influencing your decisions. Without a solid and consistent basis, this could result in alienating your customers who paid late but are generally good to have business with.

Finally

Always remember that your vision as a business owner is the driving force that propels your company forward, but it is the decisions you make along the road that keep it moving in the direction you desire. Make informed and guided decisions to achieve your goals.

Finally, improving your working capital requires data analytics and enlisting the help of professionals. Making your firm smarter through data-driven decision making, relationship building, and operational management will enable it to pursue more aggressive growth prospects.