There is no doubt that customers are extremely important to any business, they are your income and help to establish the reputation that drives more customers to you.
But, it’s essential not to overlook the monetary side of your business, it really does make the world go around. After all, without funds you can’t produce, (or buy), goods, dispatch them or even pay your staff.
In short, it’s critical you manage your working capital and cash flow properly.
What Is Working Capital?
Your working capital is the funds you have available. It can be described as the difference between what you owe and what you own, but, it is a little more complicated than that.
Working capital refers to funds that are currently available, it increases when you receive income from customers and decreases when you need to pay your suppliers, whether they are short term or long term.
Making sure there is always enough working capital to pay for the things your business needs is essential to the success of your business and the reason that companies create cash flow sheets.
Cash flow is simply a way of recording the money coming in and out of your business, including estimating what could be coming in over the next week or month.
An accurate cash flow statement will allow you to prepare for cash flow shortages or gaps in your working capital.
Here are 5 ways to improve your management of working capital:
You may not think about it but your business credit rating affects the ability of the company to get a good rate on any loans. You need to consider boosting your credit rating to improve the deals you’re offered and boost your available funds.
One of the simplest ways of doing this is to show that you are a safe bet when your business is being loaned money, you can do this by utilizing 30-day net vendors. Check out this blog post to find out more!
It’s easy to believe that the finance team looks after the working capital. However, they actually record the capital and make projections to avoid issues. Every member of your workforce should be aware of the importance of working capital and the key performance indicators that apply to each department.
These can help to ensure departments don’t overspend.
Stock is essential, you need to have it available when customers order. After all, we live in a society that expects instant gratifications.
However, overstocking means that you’re tying up too many funds which will reduce your working capital. It’s time to carefully consider the right stock level.
Another thing that is often overlooked is small expenses. These can seem essential and relatively inconsequential. However, even the smallest repeat expense can make a significant difference to your working capital.
Carefully review all expenses before you approve them.
If funds are particularly tight you can consider invoice factoring. This is when you pass the credit accounts of your customers to a third party who pays you 80-90% of the funds immediately. They are then responsible for collecting the cash.
Although you lose a little of your profit you do gain instant funds, which can really help a struggling working capital balance.
