This small business had massive growth potential. But it needed to overcome cash flow issues around tax time. Here’s how they solved this challenge quickly.
Business financing is not the only way to increase your working capital. Let’s discuss a few simple tricks to bolster cash flow.
Too often, businesses approach financing and cash flow management with a closed mind. They need to know one thing right away: Business financing is not the only way to increase working capital.
Don’t fall into the mindset that loans and selling equity are the only ways to get the money you need. A few simple changes to cash flow management can quickly free up needed cash.
If you run a business, you know that sustaining self-financing for a prolonged period is incredibly difficult. Working capital financing is necessary to bolster cash flow.
By improving the way you manage working capital, you can minimize the number of external investments and loans you accumulate during a fiscal year. Then, you can squeeze extra funds from your firm by maximizing your key drivers of cash flow.
Here is how to start that process.
New Ways to Increase Working Capital
Start by examining your current financial situation.
If you ask the right questions, you can uncover multiple ways to improve your capital management:
- Can you improve your business model to minimize or avoid unnecessary expenses and delays in payments? (Perhaps by changing contract terms with buyers?)
- Is there an alternative approach that requires less working capital, without hurting your sales revenue?
- Is there a way you can further use your assets to generate additional funds?
If you answered “yes” to any of these questions, there’s room for improvement. But where do you go from here?
When you understand all the different ways in which you can increase working capital for your company, you’re setting your business up for success both now and into the future. These are a few of the most common practices that could give your business a nice cash boost, or simply reduce cash waste.
1. Shorter Operating Cycles: File Your Invoices on Time
Your operating cycle starts when you begin spending money to work on a project. The cycle ends the moment you receive your payment. Limiting the time between these points is essential. If you wait weeks to send your invoices, it will stagger your profits and hurt your cash flow.
Depending on your industry, you may request payments within 15 or up to 60 days. Consider what is the norm and try to minimize the time between project completion and sending out an invoice. Longer operating cycles, due to delayed invoicing, could very well translate into lost income and poor liquidity.
2. Thorough Credit Checks on Customers
A customer’s bad credit score could have a direct impact on your accounts receivable. You want to make sure your customers can afford to pay their bills.
Depending on the scope of the order, you may want to run a credit check on a client before signing a deal with them. You should also consider lower credit limits for new customers.
3. Collect Outstanding Invoices on Time
Your accounting department needs to closely monitor all past due accounts. Send out inquiries if payments are delayed beyond the accepted time frame. It is crucial to uncover any issues that may be preventing your client from completing their payment.
Reminders also help speed up the collection process. You don’t have to wait until the last day to collect your accounts or send a reminder.
4. Limit Unnecessary Expenses
Apply transparency and clarity when it comes to how much you spend. This begins with examining your budget and breaking it down to its components. Make sure you’re not overspending in any area of your business. Set rules to restrict any unnecessary spending.
You may also want to examine your office and business trip expenses if you’d like to free up some capital. Focus on the bills that maintain your functionality as a company. Small amounts of non-essential cash spending could instead be used to further fuel your working capital.
5. Increase Sales Revenue
This way to increase your funds may seem obvious, but more and bigger sales equal increased revenue. Focus on expanding your sales force and exploring new marketing channels.
Base your pricing on profit margins and sales to ensure your rates are reasonable and workable.
Keep in mind that, depending on your business cycle, profits from revenues may not come in time to keep up with the bills. If this is the case for you, don’t forget to work on also decreasing costs.
6. Avoid Stockpiling
Imagine your inventory as stacks of dollar bills. Every unsold item in your warehouse is essentially a pile of money sitting on the shelf, not being put to use. This decreased liquidity makes your business less agile and less competitive.
To ensure maximum cash flow, you have to time your supplies and products to arrive exactly when you need them.
By quickly converting inventory into cash, you’ll have less capital tied up. Another benefit is that you’ll need less storage space, which will also cut some additional costs.
7. Lease Your Equipment
Technology evolves every day. Sometimes it can be financially unwise to keep investing in new equipment. Leasing is one way to avoid making large, repeated investments to stay on top of technological innovations.
It’s also one of the best cash flow management practices out there.
Apart from leasing equipment from other companies, you can make use of your own assets to improve your working capital. One way is lending your existing equipment when you’re not using it. You can also sell it to a leasing company to get a one-time cash boost. Later, you can lease it back from them only when you need it.
Another piece of equipment that business owners often overlook as a source of revenue is unused office space. Just as one might lease unused equipment, Fundera suggests selling or renting out extra offices as another way to liquidate long-term assets.
8. Leverage Your Accounts Payable
Maintaining good relationships with your creditors is often overlooked. A key part of this is maintaining a good credit score. If you’re experiencing cash flow problems, good credit and positive relationships will help you negotiate extended payment terms. This, however, is not a permanent solution to any ongoing financial issues.
While you may want to collect your accounts receivable as quickly as you can, you should delay your accounts payable as much as possible. You can use wire transfers to complete your payments on the very last day they are due. You can also consider practices like invoice financing to ensure that you get the cash you need on your terms.
Also, when you work with vendors, be sure to check for any discounts and renegotiate payment terms once you become a loyal customer.
Increase Working Capital to Keep Your Business Running Smoothly
By following these helpful hacks, you should have a better understanding of the options available when it comes to optimizing your working capital.
Through responsible spending, mindful collection, and making the most of your available assets, your company will have the capital it needs to succeed.
If you’d like to find out more about capital financing, check our article, What is Working Capital and How Does it Affect Business Cycles?
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