The simple formula to managing working capital is to collect receivables quickly and slow down payables. Of course, you will find the devil is in the details. Here we share the top 10 things you can do to increase your small business working capital.
Table of Contents
Employ a Good Collection System
A good collections system will issue quick, clear, and accurate invoices. It will also provide accurate data on collections activity, including data on late paying customers, average monthly receivables, and average losses. For credit card payments, automated dunning management tools can save you both time and cash by identifying and rectifying declines quickly. Consider outsourcing your accounts receivables with a qualified payment provider that can provide you all these features, as well as save you time on payment disputes.
Offer Quick Payment Incentives
Encourage customers to pay their bills early or on time, by offering a small discount for quick payment.
Monitor Your Cash Flow Ratio
To maintain your management goals, monitor your cash flow ratio on a regular basis and make sure it’s in line with your projections and well as the current industry average. Your ratio should allow for enough cash to cover your short-term debt obligations but not so much that you are losing return on your investment in assets.
Manage Your Accounts Payable
Take full advantage of creditor payment terms, and use electronic funds transfer to make on-time payments on the last day they are due. Consider both price and payment terms when choosing suppliers, as well as whether early payment discounts will reduce your overall vendor costs. And always maintain a good relationship with your suppliers by paying on time and making referrals where appropriate. If you do run into a cash flow emergency, communicate this to your supplier – in these situations, your customer loyalty and good payment record can go a long way.
Reduce Your Fixed Costs
Identify where you can save in your fixed business costs (expenses that are consistent month to month). For example, do annual price comparisons for office supplies and negotiate with your suppliers. Consider mitigating rent and utility expenses by sharing your office with other entrepreneurs.
Reduce Your Variable Costs
With regular, careful analysis you can generally find savings in your cost of goods sold, which are your costs that change with production. Substitute lower cost materials where appropriate, and negotiate with your suppliers.
Renegotiate Fixed Debts
Regularly review your existing credit lines to see if you’re eligible for lower interest rates or extended terms.
Manage Your Inventory and Pricing
Avoid overstocking your inventory, and base your offerings on sales and profit margins. Cut products or services that perform poorly or have low profit margins. Also, don’t forget to monitor and adjust your pricing. The Small Business Administration recommends setting up a monthly, quarterly, or annual schedule for a pricing strategy review. If costs have increased for the services you offer, consider raising your service fees. For products, make sure your pricing stacks up to your industry’s average.
Increase Sales Revenue
Decreasing costs is an essential way to increase working capital. But the best way to improve working capital (and grow your business for that matter) is to increase sales. Look for creative, low cost ways to increase sales through marketing and promotion, such as client referral incentives or free trials.
Make the Most of Tax Breaks
Before making any big finance decisions for your business, consult your current tax code or a tax professional. Knowing what the small business tax incentives are for the current tax year can have a large influence on your purchasing, investment, or sales decisions, and result in huge tax credit or deduction savings.