7 Ways A Small Business Can Manage Working Capital Effectively

Working capital management is an underrated but excellent way of propelling your small business forward. By knowing what goes into it and how to make this work to your advantage, you can improve timeliness and efficiency of your business, thus rendering it success-ready.

You can boost the business performance and save yourself the strain of running out of cash by learning to manage your working capital effectively.

Some tips that facilitate better working capital management are –

Favorable Terms with Debtors/Creditors – It is important for a small business to manage relationship with both debtors and creditors, to ensure a favorable working capital position. The balance between paying off the creditors and receiving payments from debtors has a major impact on the cash flow of the business.

Keeping an Eye on the Sales Split – How much you sell has a direct bearing on the working capital, which is why it is absolutely imperative that one prepares and relies on the revenue forecast in order to manage working capital better.

The split between cash sales and credit sales is the key element here. A business with a higher amount of cash sales would require a relatively lower amount of working capital.

Improve Invoice Tracking and Collections – Your invoices could accumulate if there is no efficient tracking system in place. It is a must that you segregate data on accounts receivables by maturity date. This helps to identify which invoices are almost due and need to be reminded. The system will also highlight those that are due for a longer duration, and these must be prioritized for collection.

Manage Procurement and Inventory – Prudent inventory management is an important factor in making the most of your working capital. Excessive stocks can place a heavy burden on the cash resources of any business. On the other hand, insufficient stock can result in lost sales and damage to customer relations. When looking at inventory, it is important to monitor what you buy, just as much as what you sell. The key challenge for companies is to establish optimum stock levels and avoid driving up costs for physical storage and insurance as well as wasting stock if it is time-sensitive. This can be done by promoting better communication and forecasting between departments.

Go Digital – In this era of digitization, going digital is one of the first ways that you can better manage your working capital, and hence the venture. Shifting from paper to a totally paperless system takes time and training, but proves to be much more efficient and smooth in the long run.

Working Capital Financing – Unless one understands what exactly working capital means and how to measure it, there will not be any standardized and sustainable way of managing it better. A small business can greatly benefit by following good practices of cash, inventory and payments management. If the situation calls for external assistance by way of a working capital loan, the business can reach out to financial lenders.

Cash Flow Management – Cash flow and working capital are inextricably tied to each other when it comes to a small business. It is best to keep a minimum cash balance, below which it would be necessary to arrange for funds. This way the small business owner won’t have to face the situation of actually running out of funds. Another way to manage cash flows efficiently is to keep financial records of all the inflows and outflows of cash, however minor they may be in order to have an accurate set of financial statements that can help the small business plan and manage working capital better.

Effective working capital management is important because it ensures that your firm is maintaining sufficient liquidity to cover the expenditure. Your working capital indicates your business’ capability to sustain its operations.

It quantifies if the company has more than enough cash flow to cover operating expenses and existing debts, or if it is just breaking even. Lenders typically use the working capital as one of their criteria for assessing the borrowers’ eligibility for short-term debt.