In a nutshell, your working capital is calculated by subtracting your current liabilities from your current assets. If you don?t have enough money to meet your current debts and expenses, or you are just barely scraping by, this needs to be addressed. Without sufficient funds to run your business, it can?t succeed; you will start falling behind financially, and it can be very, very hard to catch up. Fortunately, there are lots of ways you can increase your working capital. While things may not change overnight, and things may get worse before they get better, you can take charge of the financial health of your business with some patience and willingness to commit to the necessary changes.
Many businesses tend to do invoicing in batches, or wait until the end of the month to send them all out. If you are extending credit to customers, you are already waiting at least 30 days for your money. Why delay any further than that? As soon as a service is completed or a good is delivered, get that invoice out immediately. And to add to this a bit?consider offering discounts for early payment to get that money even faster.
Change the Way You Look at Debt
The word ?debt? has a negative connotation and we are conditioned to avoid it at all costs. And, yes, in an ideal financial situation, we would not have any (at least very little). But debt in and of itself is not a bad thing so long as we take it on responsibly. To increase working capital, it may make more sense to finance your fixed assets (ie. equipment) instead of paying straight cash, cash that could be better used to build your business. Looking into capital loans to help pay for?inventory, marketing, and the dozen other things you need to pay for to grow your business may make good sense.
Do an ?Inventory? of Your Inventory
Many businesses are tying up money unnecessarily in inventory simply because they are not giving their stock the proper review it deserves. Are you restocking items before it is absolutely necessary? Are there lower-performing products, or ones with lower profit margins that you could easily remove from the roster with minimal impact on your business? Are you regularly conducting a review of your pricing strategy? The Small Business Administration recommends doing this at least annually, though a more ideal schedule would be monthly or quarterly. To maximize capital, it may be necessary to increase prices for your products.
Have a Set Collections Process in Place
Many moons ago, I worked for a collections agency that offered flat-fee collection services; when going on sales appointments, and reviewing the business?s AR records, it always astounded me how much money they were owed, and how long some of these invoices had been?outstanding. They were doing very little to get this money, and the little they were doing was a disorganized effort to say the least. If you want to maximize working capital, you must have a set procedure in place for handling late payments which you apply in every instance.
And, this procedure should be kicked into gear the first day that payment becomes late. No need to be aggressive or mean?that first contact can simply be checking the bill was received. You provided a good or service, and you deserve to get paid; you have every right to ask for that money.
Consult the Professionals
Running a successful business often means turning to people who know more than we do; while it is important to educate yourself as much as possible about working capital and other financial matters related to your business, this does not mean you are expected to do it all on your own. If doing things like making a cash flow projection or analyzing financial statements makes your eyes glaze over a bit, it is well worth the cost to consult with financial professionals who can help you. They know things you don?t and will see things you won?t see.