Without plenty of capital on hand, your business can’t operate. You can’t fund payroll, buy new inventory or pay your overhead costs if you don’t have the money to do so. While you could get loans to help pay your expenses, that will only help in the short term. Instead, you should focus on ways you can improve your available funds. Here are four ways to improve your business’s working capital.
1. Review Your Expenses
One of the easiest ways to free up capital is to review your spending. When you take a deep dive into your accounting ledgers, you’ll likely find many areas you can cut back on. For example, turn the thermostat up a few degrees instead of blasting the air conditioning in the summer. You’ll still be comfortable and save money on your utility bill. Additionally, consider calling suppliers and renegotiating your prices with them. Let them know that you are willing to pay your invoices faster if they cut their prices. You’ll find that they will happily renegotiate what you’re currently paying.
2. Don’t Use Working Capital for Fixed Assets
While paying cash for new equipment or vehicles might seem appealing, doing so will deplete your cash reservoirs, leaving you in a potentially dangerous financial situation. Fixed assets are expensive, and you don’t want to drain your accounts to pay for them. Instead, use leasing options to purchase your fixed assets. Shop around and look for the best leasing options to ensure you aren’t paying more in interest or fees than you need to be.
3. Change Your Operating Cycle
You likely find yourself short on capital because your customers don’t pay on time. To help alleviate this, you want to shorten your operating cycle. You can shorten the cycle by sending invoices as soon as a sale has been made or asking for full payment at the time of service. If customers can’t pay in full, ask for a deposit to help cover your costs. You can also offer incentives to customers who pay their bills in the first few weeks after the invoices are sent out. For example, give them a small percentage off their next order if they pay their invoice in the specified time frame. The savings will help motivate them to pay on time, and you’ll receive your money faster.
Ensuring you always have enough working capital for your business can be a chore. However, taking the right steps can make things much easier to manage.