Improving Your Working Capital

If you’re a small business owner, then you most likely handle marketing, operations, sales, customer service, and finances. Dealing with finances can prove to be very important, since it can either make or break your business. When you’re dealing with company finances, working capital is something you come across often. Working capital is basically the amount of your current assets minus the amount of your current liabilities.

This means that working capital is money you have left over after paying bills and other expenses. When you calculate your working capital, you might see a pretty low number, sometimes even less than 1. If it’s less than 1, you currently have negative working capital, which means no money to use for growing and expanding your business. If you calculate a number more than 1, it means that your business has more revenue than expenses, and that you now can set aside that money for growth opportunities. One of the most common things that result in negative working capital is your accounts receivable. Accounts receivables commonly fluctuate, but there might be slow paying customers dragging down your working capital. Some might ignore your payment terms pay when they want, while others will wait all the way until the end of your terms to make a payment. Here are few options to look into if you want to improve your business’s working capital.

  1. Offer customers early payment incentives. Early payment incentives can be very effective. Generally, you will gain much more by giving a customer 1-2% off their invoice if they pay early than you would waiting for the money to come in at the end of your payment terms.
  2. Offer credit card payment options. Allowing customers to pay with their credit card can bring in your working capital much faster. You will have to pay a small fee to the credit card companies, but if this fits your budget it can be very helpful.
  3. Try to reduce your fixed costs. Examine your business’s fixed costs. These include your rent, utilities, supplies, and even employee costs. Now, don’t fire your whole team or cut corners that will affect the quality of your business, but check to see if there’s anything you can do to keep these costs down. Small things like not cranking the A/C all the way up in the summer or buying one less box of paper clips than usual for the office can add up. When your expenses are low, your working capital can grow.
  4. Consider obtaining alternative financing. While loans can be difficult to obtain and pay off for a small business owner, alternative financing options like invoice factoring get the money you’re owed quickly. Factoring isn’t a loan, so there’s not monthly payments or interest involved. If you’d like to learn more about invoice factoring and how it can help you, contact us today.