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7 Ways to Improve Your Working Capital

by Olufisayo
Working Capital

Strong working capital is essential to any business. It provides the funds necessary to pay for short-term expenses, expand operations, and weather unexpected financial challenges. While there is no universal solution for improving working capital, several strategies can be employed to boost your company’s cash flow. Here are seven of the most effective:

1.  How to Calculate Working Capital

Working capital is the difference between a company’s current assets and liabilities. To use the working capital formula, you need to know your company’s current assets and liabilities. When calculating working capital, subtract your company’s current liabilities from its current assets.

Your company has enough working capital to cover its short-term obligations if the resulting number is positive. If the number is negative, your company does not have enough working capital to meet its short-term obligations.

2.  Negotiate With Suppliers

When you negotiate better payment terms, you can free up cash that would otherwise be tied up in inventory. You develop a working relationship with your supplier, which can help you get the best prices on the products and services you need. Many businesses are afraid to negotiate with their suppliers, but it’s important to remember you have nothing to lose by asking for a better deal.

By negotiating with your suppliers, you can save money and improve your working capital. When it comes to negotiation, knowledge is power. Before you approach your supplier, be sure to do your research and know what kind of deals other businesses are getting. In addition, have a clear idea of what you want to achieve in the negotiation. Being prepared can improve your chances of getting your business’s best terms.

3.  Invoice Promptly

When a customer pays an invoice, the business receives cash that can be used to pay for its day-to-day expenses. When you wait too long to send invoices, it can take longer for your clients to pay. The sooner you can get paid, the better off your business will be.

Invoicing promptly doesn’t mean you should sacrifice quality or accuracy. Double-check your invoices before you send them out, and consider using an automated system to save time and ensure accuracy. Prompt invoicing can also help businesses improve customer relationships by demonstrating that they value timely payment. These steps can help improve your working capital and keep your business on track.

4.  Offer Discounts for Early Payments

By giving customers an incentive to pay their invoices quickly, you can help ensure that you have the cash on hand when needed. Additionally, you can use technology to your advantage by setting up automatic payments or offering online payment options. By making it easy for customers to pay their invoices, you’re more likely to get paid promptly.

You can also offer extended payment terms to allow your customers to take longer to pay their invoices. While this may seem counterintuitive, it can help improve your working capital. By extending payment terms, you can give yourself more time to receive payments and use the money from one customer to pay another. In addition, extended payment terms can help build relationships with your customers and encourage them to do business with you in the future.

5.  Monitor Accounts Receivable

Accounts receivable (A/R) is the money owed to a business by its customers for goods or services delivered. A/R management then monitors these outstanding payments and ensures they are paid promptly. This can be a challenge for businesses of all sizes, but it is crucial for small businesses, as late payments can quickly become a cash flow problem. There are a few key ways to improve your A/R management and, as a result, your working capital:

  • Ensure you have an accurate and up-to-date record of all outstanding payments. It may seem like an obvious step, but it is essential to ensure you are not chasing down payments that have already been made
  • Establish clear payment terms with your customers and ensure they are aware of them
  • Follow up with customers who have not paid on time. A polite phone call or email can often prompt them to take action

6.  Use Technology to Your Advantage

In today’s business world, technology is a vital tool that can help you manage your finances and improve your working capital. There are many financial software programs available that can help you keep track of your spending, income, and invoices. Using these tools, you can get a better handle on where your money is going and make changes to improve your cash flow.

Online banking and payment systems can help you save time and money by automating tasks like bill payments. By taking advantage of the technology available, you can free up working capital and use it to grow your business. Many websites and software programs offer budgeting and financial tracking tools. These tools can help you stay on top of your finances and use your working capital.

Technology can also help you save money in other ways. For example, using cloud-based accounting software can eliminate the need for expensive hardware and software. In addition, online file sharing and collaboration tools can help you reduce the need for travel and save on expenses like office space.

7.  Review Expenses Regularly

This process can help you identify areas where you are spending more money than necessary and make adjustments to improve your bottom line. For example, if you notice you are spending a lot of money on office supplies, you may consider switching to a more cost-effective supplier.

It also helps you catch errors or discrepancies that could negatively impact your business. Additionally, this process can help you keep track of changes in your costs to make informed decisions about pricing or other strategic decisions. Many businesses find it helpful to conduct an expense analysis every quarter. It allows them to keep track of their spending and make changes as necessary.

Working capital is essential to the success of any business. By taking the time to understand how working capital works, you can ensure your business has the cash it needs to grow and succeed. In addition, by implementing some of the strategies discussed above, you can improve your working capital and use it to grow your business. Taking control of your working capital ensures your business is on solid financial footing.

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