Your small business’ working capital is a barometer of how you can pay daily financial needs and maintain operations. Once its level dips, you might encounter problems with cash flow. It is important to keep it at a high or good level so that it doesn’t have a negative effect on operations.
These are some of the practices you can implement to improve your small business working capital.
Always Do Credit Checks
Customers with poor credit scores are not good for business. That’s why it’s important to do credit checks. A customer with a poor payment track record is likely to pay late. Providing credit has its benefits, but you need to create and implement a policy that protects your small business.
Reduce the Time of Operational Cycles
The better your cash flow is the higher your working capital will be. Improve both by reducing the time of operational cycles. This is the process of turning money used for producing products and sales into cash. Long cycles hold cash and increase the possibility of non-payment or late payments. This has a negative impact on your cash flow and business working capital.
Some of the ways to shorten cycles include:
- Upfront payments
- Sending an invoice immediately after a sale
- Changing credit terms
- Asking for a deposit
Cut Bad Debt
When you offer a line of credit to customers, you hope for the best. However, there is still a chance that it might turn into bad debt. This freezes cash and reduces your working capital. Cut bad debt by implementing these practices:
- Improve credit management
- Collect payments sooner
- Determine the demand for products with sales forecasts
- Offering high margin products
Curtail Unessential Costs
Your business expenses might be affecting your working capital. Identify unnecessary variable costs within your operations. This frees up cash and boosts your finances for immediate company needs. Try to negotiate the terms of your payables. Work with partners to get discounts and/or better payment terms.
Avoid Using Working Capital for Fixed Assets
Your small business will eventually need fixed assets. These can be properties, equipment, land and others. These provide you with opportunities for long-term expansion. However, using working capital to purchase and pay for fixed assets ties up needed cash. Use a long-term loan instead whenever you invest in a fixed asset.
These are some of the practices that improve your small business’s working capital. These boost your cash flow and provide your company with financial flexibility. We at Robookkeeper can be your partner whenever you need affordable bookkeeping services.