How to Effectively Manage Working Capital?
Do you know why 82% of small businesses fail in their initial years? One big reason is poor working capital management, resulting in short of cash flow. In such scenarios, buying inventory and meeting the day-to-day expenses becomes a huge problem. Consequently, many businesses need to shut down operations.
Working capital can help in running business operations smoothly. Let us learn about it:
Understanding Working Capital
Working capital refers to the current financial health of a business. It revolves around your current assets and liabilities. The current liabilities include the short-term account payable and debts. Likewise, the current assets are the account receivable, cash, and inventory.
You can calculate the working capital when you eliminate all current liabilities from your current business assets.
Why Do You Need to Calculate the Working Capital?
Businesses need to calculate the working capital to ensure that they are in a position to meet their current needs. If working capital is negative, you cannot think of business expansion. Likewise, investors are less likely to trust your business. For a smooth flow of cash, you need to manage the working capital.
Tips to Manage Working Capital
Here are three useful tips for you:
Keeping Minimal Inventory
When you reduce stockpiling, you will have more cash in hand. Your company can use this cash for running routine operations. You can also utilize it as an investment in growth opportunities.
More inventory means more storage space, handling, and insurance fee. You can eliminate these additional expenses, which can also increase profitability.
Additionally, try to increase your inventory turnover. It is the ratio that tells how many times a business sells its inventory over a given period. A high turnover means the business is more rapidly converting its inventory into cash. That is how inventory turnover increases the working capital.
Creating Coherent Credit Policies
To have more working capital, you must ensure that a good amount of cash flow is coming into your business. Apart from selling inventory, there are more ways of generating cash. One of them is recovering your accounts receivables.
It is the amount the business receives when selling goods on credit. A sound policy addressing the maximum credit amount, extension date, and recovery plans can help you with a speedy cash collection.
Selecting the Best Financing Option
Instead of choosing short-term loans, try to select financing options with a long-term payment plan. This way, your business will have more cash for paying the vendors.
It will also help you in purchasing inventory and fulfilling routine expenses on time. Thus, the business will develop strong client relations, which might not be the case with short-term loans.
All in all, understanding working capital, which is a measure of a company’s short-term liquidity, is essential for business growth. Prompt actions and sound policies to increase the cash inflow can help run routine business operations smoothly.
Sigma Consultancy provides professional assistance to improve working capital. We have sound strategies for cash flow, accounts receivable and payable, inventory management, and financing options. Contact us to improve your financial performance.