Working capital represents the money your business has to cover your daily business expenses. Therefore understanding how to increase working capital is critical for you to be able to expand investments and meet the financial obligations of the business.
Increase your business working capital
Effective working capital management is also critical to enabling your company to make new product purchases and avoid bankruptcy.
Working capital is calculated by subtracting the current liabilities from current assets.
Some studies indicate that the ideal would be for companies to have the objective of having R $ 2 in current assets for each R $ 1 of current liabilities. A company with a ratio of 2: 1 is effectively managing its working capital.
A business with negative working capital is having serious and possibly immediate problems, but any company with a working capital ratio of less than 2: 1 may be experiencing difficulties.
To ensure that your business has enough money to meet its daily financial obligations as well as to fund normal business operations, you must manage your accounts efficiently and effectively by finding ways to increase working capital.
How to increase working capital: 6 ways to control
The following are 6 strategies on how to increase working capital.
Each of these strategies requires you to analyze various areas of your business to find ways to:
- Optimize processes
- Reduce expenses
- Increase cash flow positive.
1. Improve the organization of accounts receivable
Encourage your customers to pay on time by offering up-to-date payment incentives.
The delay in receipts already billed impairs your financial planning and of course, destabilizes your working capital.
You can also make a task force to try to get those clients who are late payment long. Create incentives, such as payment terms that facilitate debt settlement.
2. Negotiate with suppliers better terms of payment
Negotiate better terms of payment with suppliers and distributors of materials, improves payment management.
You should review the terms of payment on your accounts payable as well as the terms of payment on your accounts receivable. Balancing both so that your company is in a more favorable cash flow position is critical.
If a vendor is not willing to negotiate more favorable terms for you, you may need to replace it. This is your business, and that’s one way to increase working capital, to survive and thrive.
3. Reduce expenses
Review your fixed and variable costs to determine if there are areas to improve cash flow. For example, office supplies, equipment and technology represent expenses that could be reduced through negotiations, new suppliers and so on.
4. Do not finance fixed assets with working capital
We suggest that entrepreneurs do not use their working capital to finance fixed assets, such as equipment.
Many small businesses tend to use working capital money to pay extra bills. It’s an old mentality. In the end, it would be better to use long-term loans to pay for fixed assets. It allows entrepreneurs to breathe easily and pay for assets at a defined pace.
You can easily recoup the interest costs of a long term loan. For example, if you maintain a good cash flow and can pay your suppliers quickly, you are more likely to be able to get discounts.
In turn, these discounts can partially pay off the interest on your loan. Eventually, you will recover the cost of the loan.
5. Get outside counseling
It is not always easy for entrepreneurs to see how they can improve their cash flow, so a recommendation is for business owners to seek outside help.
A consultant usually helps entrepreneurs make a thorough assessment and examine key areas such as:
- Sales Cycle
- Inventory Turnover
- Credit conditions for suppliers and customers.
They can also find areas of the business where there is room to streamline processes and find ways to generate more money internally.
6. Manage your inventory
Do not overload your stock. Make sure the products are sold as fast as possible and are not idle at the warehouse. For this it is important that you learn how to calculate the turnover of the stock.
Through this mathematics, you:
- Increases profitability
- Reduces maintenance costs
- It broadens the flow of merchandise and working capital.
Plan to cut products and services that are not selling.
7. Perform efficient financial management
To understand how to increase working capital you need to closely monitor the entire financial movement of your company.
Keep the financial statements and reports up to date and calculate the indexes periodically.
This will allow your company to have a clear view of the financial position at all times and will provide you with avenues for improvement.
8. Seek financing for your working capital
When managing a business it is important to keep in mind that looking for a low rate loan are strategies on how to increase working capital.
Whether it is to increase your investment capacity in raw material or stock, either to increase the team or invest in marketing actions.
If you want to better understand how to evaluate the timing of requesting an external contribution, we suggest you read the article; ” When to make a loan: 4 reasons why credit is the right choice .”
Working capital is vital to the daily operations of a company, such as:
- Acquisition of raw materials and products for stock
- Payment of salaries and overheads
- Ensuring that production meets demand, among other key objectives.