When you’re running a business — especially one that produces goods — you have to keep a close eye on your money. There is a constant flow of money into and out of the business, and keeping track of all of it is often referred to as working capital management.
Your working capital is the money your business is able to put to use as it sees fit, and managing that money requires you to stay agile. There’s a lot that goes into working capital management, but these six tips can help you think about ways to improve money management for your business.
1. Automate
One of the most important aspects of working capital management is keeping track of everything. In order to manage your capital, you need a close eye on all incoming and outgoing money. The easiest way to keep that close watch is with automation.
You can automate payables and receivables with electronic tools. This ensures better accuracy as you track expenses and payments. It also helps payments stay on time, and it empowers you with tighter control over your management systems.
2. Pay on Time
Speaking of paying on time, it’s an important part of capital management. This might seem obvious, but when you pay on time, things go better. You avoid any late fees that might be included in vendor or supplier contracts.
More importantly, when you consistently pay on time, you develop a better relationship with your suppliers. With this good standing, you may garner favor or preferential treatment over any business that doesn’t consistently pay on time.
As a reliable customer, when you want more flexibility or to renegotiate contracts, you have that good standing to work with.
3. Source (News - Alert) More Creditors
Working capital management is all about securing funds for business operations. You won’t always be able to secure those funds through direct sales. It’s perfectly normal to use credit options to maintain your incoming supply.
Since that’s part of your expectations, it seems clear that having more credit options is a good thing. Talk to alternative lenders. This will expand your options when you do need to borrow, and it creates a more robust cash flow system that keeps the operation running during times when your own liquid capital is a little short.
This is standard for many businesses, so take the time to source more lending options to make your business more robust.
4. Leverage Your Assets
One way that you can expand your borrowing options is to consider additional types of loans. Sure, there are business loans that will give you enough cash to make important purchases and keep everything moving in the right direction.
You can also consider asset-based loans. If you are willing to borrow against your business property, heavy equipment, or anything else with sufficient value, it becomes a lot easier to secure loans when you need them.
Your business has valuable non-cash assets. Borrowing against them effectively liquidates those assets in a tax-advantaged way.
5. Reduce Stock
Excessive stockpiles are the bane of many major businesses. You poured liquid capital into building up that stock, and now it’s just sitting around. Stock only makes money when sold, so if you have too much in warehouses, then it’s soaking up capital that you could otherwise be leveraging for business growth.
Avoiding excess stock isn’t always easy, but you can combine this with the first tip. When you automate more of your business paperwork, it’s easier to track sales trends. By doing this, you can plan ahead more carefully and lower production when you expect sales lulls. This keeps more of your capital out of your stock and gives you more freedom to run the business.
6. Collect Your Money
Outstanding invoices also eat up a lot of capital. You are owed money, so collect it. Doing so fixes a lot of cash flow problems, and you build up liquid capital that can be used as you see fit.
In many cases, outstanding invoices only exist because of poor communication or dropped balls. As you automate more aspects of your working capital management, you are less likely to drop said balls and end up with outstanding invoices. Your automation helps you find where you are owed money so that you can remain more diligent about bill collecting. This keeps your cash flow healthy and eliminates one of the great challenges of capital management.
Clearly, capital management can be a very complicated element of running a business. There’s a lot to consider, and as your business grows, things only get more complex. But, staying on top of capital management is essential. If you don’t have a tight grip on the flow of money through your business, you can easily get caught in moments where you can’t afford to operate normally or adapt to rising challenges. Keep these tips in mind, and never stop trying to learn.
