In the simplest of terms, working capital is the money a business needs to carry out its day-to-day operations, such as procuring raw materials, paying wages to employees, and meeting the necessary expenditures. As such, you can call working capital the backbone of any business.
If one thinks from the perspective of the owner, a clever way to improve the working capital is to collect receivables earlier than their due date and to delay the payables later than their due date. In reality, the situation is just the opposite. Businesses keep falling short of cash at times and look at financing as the remedy to their problem. Thankfully, there are many ways to increase the working capital of your business.
Get Receivables on Time Through Incentives
It is the common grouse of the vast majority of business owners that their customers delay payments of their invoices. The experts at JD Capital Finance argue that you can increase the chances of collecting receivables early by giving away incentives to your customers. If you look at the response of the customers, you will find that they adopt delay tactics as they do not see any profit in paying their invoices on time. If you incentivize early payments by giving away substantial discounts, you will never find yourself short of working capital anytime during the month. At the same time, keep track of the payment history of clients to pin down delinquents. It will solve your problem of the shortage of working capital considerably.
Generate Timely Invoices
You must understand that you are doing business to earn profits and to pay salaries to your employees on time and not to make your clients happy by presenting invoices late. The operating cycle of your business commences as soon as you pump money on an order received by a client. It ends the moment the client pays or clears the invoice. It is in your hands whether to elongate or to shorten this operating cycle. For the financial health of your business, the better it is to keep the operating cycle as short as possible. Also, the trend or norm of presenting the invoice to the client is different in different industries. In some industries, the invoice is presented after 15 days whereas in others this time could be as long as 60 days. Try to squeeze this period from your end by a few days, and you will find the condition of cash flow improving in your business. However, make sure that by generating invoices a little early, you are not hurting your reputation. Just keep in mind that poor capital flow always results from delayed financing and
Start Running Credit Checks Of Your Customers
If you were to run a credit check of your client, it would seem blasphemous to you especially if you have full confidence in your customers. But you never know if some customers own a very poor credit score. These are the black sheep who are responsible for poor liquidity in your business The overall situation of accounts receivables in your business becomes bad only because of these clients. It pays to check the trustworthiness of your customers by carrying out a credit check soon after receiving an order. Delay signing of the contract until you have run a credit check and found the credit score of the customer satisfaction. This small precaution taken on time will save your business from poor liquidity.
Never Deplete Working Capital For Buying Fixed Assets
It is a cardinal sin for a business owner to use his working capital to finance fixed assets like the plant and machinery. When cash at hand has been used to purchase fixed assets, it is natural for the business to be on shaky and slippery financial ground when assessed by other financial institutions. Lenders don’t consider the business healthy when it is facing a problem of working capital which has been utilized to buy fixed assets. It is always a prudent idea to secure a long-term loan at a low rate of interest to finance fixed assets. It gives the much-needed breathing space to entrepreneurs, and they can fall back upon their working capital to meet the expenses of day-to-day operations. Many entrepreneurs use the discounts secured from their vendors and suppliers on account of timely payment to pay the interest of the long-term loan taken for the purchase of fixed assets.
Increase Working Capital By Taking Loans
Many business experts feel that it is feasible to take long-term loans at easy terms and conditions to increase depleting working capital. This loan should be regarded as an investment into business rather than an expense. If you do not have the inventory, how can you dream of massive sales to large numbers of clients in the first place? It is through the working capital that you pay for this inventory and create opportunities for your business. Working capital is the backbone of your business and there is no harm if you have to borrow money to increase the levels of working capital.
Seek Advice From Experts From Outside
This is an old, and also tried and trusted formula for finding a solution to the problem of working capital. When you are involved with a business, it is not always possible to get a clear-cut perspective of the working capital. Your view is always colored and clouded, and you cannot take a neutral approach. In such a situation, it is always a good idea to seek expert help from someone outside your business. Business consultants are having complete knowledge about all aspects of a business, especially the working capital. By paying a small fee, you will get expert advice on novel ways to improve the condition of working capital in your business.
Improving the situation of cash flow is the only way you can take your business on the path of stability and success. You are the owner, and you know the best way to increase the working capital. You can learn about more ingenious ways of increasing the working capital by searching on the web.