Managing working capital effectively is an integral factor in small business success. To calculate your company’s working capital, subtract the current liabilities with payment due in under a year from current assets that can be converted into cash in under a year. Follow these tips to increase profits and strengthen your company’s operational cash flow.
Improve Invoicing Methods
To ensure that your company always has enough working capital to meet its needs, you need to have an efficient invoicing system in place. Send invoices to your clients as soon as you deliver products or provide services. Make the terms as short as possible, and send reminders as soon as payments are late. On the other hand, because you want to keep working capital in your company as long as possible, negotiate favorable payment terms with your vendors, and delay payments until they are due. This ensures that money flows swiftly into your company but goes out more slowly.
Manage Inventory Effectively
Your inventory comprises a substantial portion of current company assets, and how you manage it is important to providing your business with sufficient working capital. A large amount of inventory is favorable if it sells swiftly but a drawback if it takes up shelf space and costs you storage fees. It’s important to forecast inventory needs by estimating future sales. If some inventory isn’t moving at all, consider selling it off at a deep discount to free shelf space and reduce storage costs.
Effective management of working capital includes strategic planning for the future. Estimate upcoming short-term and long-term needs so you can prepare for major expenses. For instance, you may need to relocate to larger facilities, upgrade your computer system, hire more employees, or provide further training to the staff you already have. Don’t let future expenses take you by surprise.
For more advice on managing the working capital of your small business, get in touch with Skybridge Capital Group.