In today’s competitive business world, every entrepreneur is looking for ways to operate their business in a smooth and easy manner. Working capital plays a crucial role in maintaining everyday activities of a small business — as it is the capital a business uses for routine trading activities.
Working capital is the capital determined by the difference between current assets and liabilities. Current assets such as cash, accounts receivables, inventory and current liabilities like accounts payable, advances received from customers, are some daily transactions used in all small businesses no matter how big or small your business is.
Below is a visual representation of the working capital cycle that most corporations adhere to — to get the most out of it.
Source: CFI
Small businesses these days have many options to secure working capital so that they can execute their business ideas. Entrepreneurs can go for short term loans or Fast Capital to streamline their everyday operations by ensuring the availability of working capital.
Here are some tips that can help small businesses to use their business capital in the most manner possible.
1. Manage Procurement & Inventory
The main purpose of working capital is to make sure businesses have enough cash to easily run their day- to-day operations. The inventory and procurement can often shrink your operating working capital. The lower the value of the working capital the better will be the cash position of your business.
Reduce Your Inventory
Maintaining a high stock level can lead to increase in your assets, but at the same time, having a high stock level can also become a liability for your business. This is because in order to maintain your inventory different costs are incurred which include: storage costs, supervision costs and in case of perishable goods (contingent costs) if the stock doesn’t sell on time.
Reduce Your Order Intake
Order size should depend on the forecasted demands or expected sales of your products. Reduce your order size – or depending on the product or service that your business provides – go with the Just in Time or Drop-shipping inventory approach. If the supplier has a minimum order requirement, exercise all your bargaining power or depending on the relationship you maintain with the supplier you can also ask for a longer repayment period.
2. Enhance The Receivables Process
A common occurrence especially in small businesses is that the money often becomes tied up in the receivable process. Delayed payments or bad debts have a negative impact on your working capital. In a small business, as these transactions are less transparent, the best way to deal with such a situation is to improve your receivable process.
Maintain Customer Invoices
Maintain proper customer accounts in a way that is easy to review and where you can alter the customer data conveniently. Also, make sure that only authorized people can access this information so that no data is misused or lost. A small business can also use the latest technological devices to record data as these can also help to improve the billing process.
Shorten The Receivables Period
In addition to enhancing your invoice cycle, make sure that you shorten your receivable period in a way that, it is not only convenient for the customers but also beneficial for your business. Send out invoices to customers as quickly as possible — which will lead to faster repayments on the receivables.
3. Control Your Expenses
Working capital is used to cover all the short-term expenses and costs that are incurred by a business. Positive working capital can be attained if a business is able to identify its fixed and variable costs and is also able to reduce them to some extent.
Assess The Current Business Process
Evaluate the current business processes and assess at which level you can reduce your expenses or costs. In a small business, often the petty cash expenses are neglected but these expenses can mount up and affect the working capital negatively.
Also make sure that no employee uses the petty cash for their personal expenditures (when you are running a small business.) Analyze expenses in depth and if this is the case take immediate action.
Use Of Technology To Seek Alternatives
Your business can also make use of Internet and other available technologies to help reduce its expenses. If a certain material that you are using in the production process is actually a hindrance to the overall cost incurred to manufacture that product then in such a situation you can look up for alternatives of that particular material or other suppliers that can provide you the same material at a lower cost.
4. Reassess Your Payments
Many suppliers and vendors send receipts for payments. For a small business it is important that you manage and make improvements in the payable process. If you don’t take the required measures to manage these invoices it might lead to late payments with additional charges and also affect your relationship with the suppliers.
Increase Days Payable Outstanding
It is always better for your business if you are to pay your suppliers on a later term. This will give you a better time frame to work on your other expenses and payments. Cordial relationship with the suppliers can lead to better payment periods. Businesses having a high Days Payable Outstanding can also use this cash for short term investments.
Make Timely Payments
For a small business, it is important that you have a strong relationship with your vendors. Businesses that have a better relationship with their suppliers are in a better position to negotiate, exert their bargaining power and make better deals with the suppliers. A strong relationship can be maintained if your suppliers are satisfied — and one surefire way to do this is to be timely with payments.
5. Strategic Planning
No matter what business sector you work in, it is important that you examine your capital needs for the coming months. You can use your working capital for short-term improvements such as employee training or adding something new to your business that might attract customers or suppliers. Hence, working capital is a useful tool for strategic planning.
You might also consider to save some funds that might help you in your long-term goals or projections. Managing your working capital this way might sound tiring or even time consuming, but for a small business it is essential to make use of new opportunities to compete in the modern business world.
Unforeseen Circumstances
You should always leave some slack for unforeseen occurrences or accidents. A transportation vehicle, material or inventory might get stolen or damaged. In order to deal with such accidents it is important that you set aside some time that could be utilized in case of emergencies. Moreover, this can also help you to take advantage of a passing opportunity. For instance, if a rival company introduces a new product in the market you might use this time for an advertising campaign.
I hope you enjoyed this blog post about to tips to use for working capital with a small business in need of funds.
Interested in more articles about small business funding?
Read Related Resources:
• How Startups Can Get Funding Without Banks Or Lenders
• Tips To Cut Down On Expenses And Reduce Necessary Capital
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