What Is Working Capital? | Behalf
3 Steps to Take Control of Your Business’ Working Capital
What is Working Capital?
Working capital is the linchpin of your business. It is the available money you use to pay for your immediate and short term business needs. When businesses have negative working capital accounts, it is typically a symptom of a larger issue within the company.
However, even healthy businesses can experience negative working capital accounts if they are in a rapid growth phase. If next month’s orders are consistently growing at a rate of 2x, it becomes difficult to meet demand with the last few months of receivables. For one reason or another, most businesses experience a cash flow gap at some point.
That being said, businesses often turn a blind eye to working capital management, either flat out ignoring it or trying to remedy it with temporary fixes. Depending on the state of a business’ working capital accounts, taking out a loan or two is like placing a bandaid on your financial wounds: it won’t make them go away. With so much at stake, it is time for you to face the music and regain control of your business’ working capital accounts. This may even end up saving your business.
The road to working capital redemption looks different for every business. Some businesses turn to external financial assistance, specifically those that specialize in working capital management. These firms take a comprehensive approach to the matter, but no one knows your business like you do. Before you seek out services to fix your working capital woes, look internally.
The following list details 3 steps you should follow if you want to make an educated decision about your business working capital needs.
Check the Pulse of Your Working Capital Accounts
The first thing you must do to improve your working capital is learn about the condition of your finances. Working capital is driven by many forces. There is no simple fix, but finding solutions are worth the time investment. In order to get the big picture of your financial status, turn to your business cash flow statement. The cash flow statement will detail how your business utilizes money. It traces cash inflows and outflows, including your cash reserve, open payables, receivables, and money owed. This is the best place to start your analysis.
Pay Attention To Key Indicators In Your Working Capital Accounts
For healthy working capital accounts you want to pay attention to the way the following indicators perform: receivables, payables, and inventory. In order to optimize their functioning, you need to implement certain changes. For receivables and payables, you must fine tune your billing and payment procedures. Using a better system for collecting payments and paying bills will increase the flow of cash. Essentially, you want to accelerate incoming cash by tightening the terms you offer your customers or leveraging a payment processor. At the same time, you want to leverage any extended terms available by any of your suppliers to delay your business payments. Chances are your business already has the cash it needs on its balance sheet; restructuring the way you manage working capital will free up that cash.
Collaborate with Your Customer
A simple way to avoid transactional hiccups that might stunt your working capital accounts is to collaborate with your customer. If you open the lines of communication with clients and work closer to them, you can better match your production to their consumption and negotiate more effectively. Maybe you are buying more inventory than you actually need? Perhaps you can modify the timing of your delivery schedules to decrease the amount of time between cash out and cash in? This strategy promotes efficiency and also carries over to your suppliers. Keeping orders, production and distribution in check can lead to immediate savings and improve inventory levels.
Finding the proper way to manage your working capital accounts is a process, but you owe it to yourself and your business to figure it out. If these three steps do not alleviate the flow of your working capital accounts, it is time to look for an external solution.
How To Find Working Capital
Behalf, Inc., is a fintech firm that provides short-term financing and flexible payment terms to U.S. based businesses. With no hidden fees, Behalf provides business credit lines to small business owners, giving them more working capital and control over their cash flow. Qualify for a Behalf purchasing line of credit and increase your business cash reserve.