Working Capital is basically a measure of how well a company is doing on a short-term basis. It is the amount that remains after a company’s liabilities have been deducted from its assets. Working capital is what the company needs to run its day to day activities. A low working capital shows that the company is in trouble and so one should try to have a higher, positive working capital.
Some ways to increase it are detailed below:
- Enhance the collection system
By making sure that all invoices are sent out and all payables are received in time, the company can ensure that it has the funds that it is owed for that month or period and thus can make transactions accordingly without going into deficit. Different credit card payment systems, management tools and even outsourcing can be employed to enhance the system.
- Incentivise early payment from debtors
Offer discounts on early payments or on bulk payments for debtors (and if the business model allows also for customers) so that payments are always received in time.
- Keep an eye on your cash flow
Make sure that your books are always balanced and that the cash flow is monitored. Set a time period after which you check whether the cash flow ratio is going as planned or is it too slow, too fast or going completely off tangent. You should be able to pay off your liabilities and still making a healthy return on investment after that.
- Reduce costs where you can
This seems pretty basic but always needs to be strategized and carried out carefully. Analyse where your company is losing money on a daily basis and the curb those costs. One way is to try to cut overhead costs by implementing cost efficient policies in the office space for big things like lighting to little things like the paper used. If the working capital ratio is really going low, such drastic changes need to be made. The same can be done with product costs as well, for example by substituting materials used in the manufacturing process or hiring different suppliers. But try never to compromise on quality as that could have devastating effects on sales.
- Keep an eye out for tax incentives
Taxes can be quite a necessary nuisance. So always consult a tax advisor and see if there are any tax incentives in your industry that you can use to simultaneously raise sales revenue and reduce liabilities.
- Consider alternative funding sources
If your bank is charging a lot for small business loans, try looking for other options such as business cash advance loans. Even if the interest rate is high, the time frame is usually low and the cash is readily available. Furthermore, in times when sales are low, the loan repayment can be adjusted to allow for fewer liabilities on the company for that time.
- Increase Sales Revenue
A sure-fire and obvious method to improve working capital is to focus all attention on gaining more out of the sales department. Nowadays, an easy low cost method to gain more attention to a brand is the social media network. Use such low cost tools to your advantage to increase sales at with minimal cost.
Working Capital determines how the company is running on a day to day basis and is a clear indicator of its health. Therefore, making sure that it is positive and keeping an eye on it should be an unavoidable task for every entrepreneur, especially of a small business as those tend to be the ones which get affected the most with slight changes to working capital.