Effective financial control and management prove crucial to the success of your small business. With this in mind, one of the most important metrics of financial control in your business is working capital. So, what is working capital? Working capital is the difference between the current assets, such as inventory and cash, and current liabilities of your business.
Realistically, your working capital measures your company’s short-term financial health and operational efficiency, and it basically displays the balance between what you own and what you owe. If you want to generate maximum revenue from your current business activities, keep your working capital ratio ranges anywhere between one and two.
Sufficient working capital ensures your company has the cash it needs to fund operations. You need working capital to pay for inventory and cut payroll cheques. In addition to smoothing your financial operations, effective working capital management helps improve your company’s profitability. If you run a startup or SME, effective working capital management can make the difference between struggling and success.
Pay Vendors on Time
You should always pay your suppliers on time if you want to build solid and mutual working relationships with them. This puts you in a strong position to ask for discounts and negotiate better payment terms, which could save you money and time in the long run. Payment discipline also allows you to place recurrent orders and buy in bulk while keeping your working capital ratio above 1.
Make Informed Business Finance Decisions
Unlike loans, working capital stays readily available and doesn’t incur any interest, which makes it one of the fastest and cheapest sources of cash for your company. Determining your business requirements and how you can fund operating capital proves a vital step in effective working capital management. You need to consult with your team on the best sources of financing for working capital, which may include issuing debentures and asking customers for advances. If necessary, borrow short-term loans from banks to boost inventory. You should hold back sufficient operating liquidity to purchase inventory, pay suppliers, and handle common business expenses. When necessary, offer your staff members business finance training so they have the same outlook when it comes to financial management.
Manage Your Stock Properly
To make the most of your working capital, carefully monitor procurement processes and inventory. Also, keep enough stock for effective management of cash resources and better customer relations. Just as much you monitor what you buy, evaluate the quantity you sell for optimum levels of stock, and look for ways to save on storage, insurance, and business-related costs. Additionally, conduct regular inventory checks, remind your procurement team to control purchases, and automate and synchronize the purchasing and selling processes to effectively manage your inventory. Calculating inventory turnover may also aid in estimating the quantity of stock you currently hold.
Manage Your Debtors Effectively
Effective working capital management requires you to improve the chances of payment to keep a continuous flow of money into your small business. Reliable credit control procedures and thorough credit checks may help know which customers are likely to pay off their debts on time. Sell on credit only when necessary and after you confirm you have enough cash to offset the debts.
Managing working capital properly means you need to pay vendors on time, make informed financial decisions, monitor your inventory, and properly manage your debtors. QuickBooks Online provides excellent tools for recording and tracking expenses and revenue plus offers easy reporting when you need to analyse your financial information. More than 5.6 million customers use QuickBooks. Join them today to help your business thrive for free.