A Few Tips on How to Manage Your Working Capital

Working capital is the cash-on-hand available to a business for day to day operations. A retail grocery store may need cash on hand to pay vendors that require payment on delivery. A clothing boutique may need funds to pay for buyers to go to various fashion events to determine what to buy for the coming season and an auto mechanic needs money to purchase parts and supplies to complete car repairs. Manufacturers need working capital to purchase raw materials to make their products. Every type of business needs working capital. Effectively managing working capital is one of the strongest skills a small business owner should harness.

In terms of finding a few tips on how to manage your working capital, there are three objectives to consider. The objectives include having enough cash to make necessary payments when due, making sure the money does not cost more due to interest on a loan or overdraft protection policy, and planning for increase cash flow needs in the future. To meet these three objectives, you must skilfully manage how money is managed in other areas of your business such as debtors, creditors, and tangible assets.

Debtors. Customers who buy from you on credit, even moderate credit terms like 30 days, have your company’s working capital health in their hands. If they do not pay on time, your cash flow can be seriously dented. Therefore, do not let poor paying customers go too long before taking action. Problem accounts could be moved to a cash-only basis before they put too much strain on your funds.
Creditors. Just as you should not overload your household with more debt than your income can support, your business’s creditors should be kept to a minimum both in number and accrued balances. When possible, take advantage of early payment discounts or pay cash to avoid interest. However, there may be times when financing is a better option than using working capital. This is generally true for large purchases such as facilities, transportation, or expensive equipment.
Inventory. Carrying high levels of inventory when it is in demand is good for business as well as revenues. However, carrying a lot of inventory when demand is low hurts your cash on hand. When cash is tied up in inventory, sales must increase in order to rebuild cash levels. Similarly, a shiny new facility may be nice, but if it leaves you cash strapped, you won’t have the working capital you need for day to day expenses.