Working capital-or current assets minus current liabilities �� is essential for a small business�� fundamental financial health. It serves multiple Financing purposes, such as purchasing new inventory, hiring employees, paying creditors, or funding new projects. Whatever you need working capital for, it��s a key part of the way you handle your day-to-day operations, which makes it crucial that you maintain positive working capital.
It��s important to remember that the working capital ratio should never be less than one. Optimizing the position of working capital makes a business capable of running smooth operations, improve productivity, gain higher profits, and in parallel, strengthen the relationship with vendors and customers.
According to a U.S. Bank study, a whopping 82% of businesses that fail do so because of cash flow problems.
Listed below are few tips to optimize cash flow for your small business so you can avoid being a part of that 82%.
Choose Long-Term Debts Over Short-Term Debts
A short-term fund is ideal for current obligations, but not a great option for growing business. Aside from managing day-to-day operations, small business owners should be cash sufficient to facilitate growth opportunities and meet unexpected business expenses.
Small business owners should make it a point to choose long-term debts for operational cash flow to build a long running business.
Factor Accounts Receivable Invoices
Accounts receivable Invoice Factoring is one the quickest ways to raise working capital and fill the cash flow gap.
Between invoicing customers and paying vendors/suppliers, small businesses can sell their outstanding invoices and plug the cash flow gap. For seasonal business demands, inventory purchase, or other overhead expenditures, AR financing is a good option to go for.
AR financing may be easier than securing a traditional bank loan. You need not worry about collateral, credit check, or maintaining a commendable balance sheet. In less time, with fewer obligations, you may be able to get cash in hand.
Improve Inventory Management
Inventory management is necessary to maintain sufficient cash flow for a business organization. Generally, it��s understood there is no substitute for cash and inventory is an investment that can give maximum benefits if managed well.
Business owners should not over-invest on inventory especially when products can go obsolete or if they are perishable. Products with short shelf life should quickly make their way to customers.
Also, working by assumptions without proper analysis on the inventory will leave you dealing with errors and inaccuracies impacting the business Cash Flow. Using appropriate inventory management tools will save your precious business time and the money invested.
Offer Early Payment Discount for Credit Customers
Small business owners can motivate credit customers to pay on time by offering early payment discount.
Between the time a service is provided and getting paid, businesses may experience cash flow problems and this might prove challenging to fund the working capital. Offering an early payment discount will motivate customers to pay on time and help you avoid late payments.
Keep track of Accounts Receivable
Accounts receivable are the payments owed to a company from its clients. It is often recorded as an asset and offered as a line of credit to the clients. If a business has receivables then it shows it has made a sale but is yet to receive the payment. The problem is collecting accounts receivable from clients is a challenging task.
To get the checks start rolling more quickly, small business owners should monitor accounts receivable more closely and frequently. Using powerful accounts receivable tools can be a clever option and can boost efficiency in payment follow ups.
Based on the payment terms, you can also remind your customers well in advance of the approaching invoice date and due date. This can assist the customer in planning and making necessary arrangements for payment before the due date.