Working Capital Management: 5 Signs It’s Effective For Small Business | Behalf
5 Signs of Effective Working Capital Management
Working capital is the driving force behind your business and how you go about managing working capital directly impacts your business’ health. Effective working capital management guarantees your business is able to pay for daily operational costs and satisfy short-term expenses. To grow successfully, your business should have enough working capital to account for emergencies, cash inflows and outflows, and also allow you to take advantage of opportunities, like marketing and sales investments, that benefit business.
Working capital management makes sure cash is circulating well throughout your business. While some small business owners fail to recognize the importance of managing working capital, others are simply unsure how to visualize and implement winning working capital management strategies. This article lays out 5 clear signs of effective working capital management.
1. A Strong Production Plan
Production must not be disrupted by any means. To ensure the chain of production runs smoothly, you need proper production planning. A strong production plan accounts for risks and complications within the production process, plus funding on hand to deal with all outcomes. This plan should standardize production (i.e. map out production steps and their duration). A strong production plan should also be well communicated to ensure it is properly executed.
2. An Abundance of Raw Materials
It is essential for your business to have the raw materials it needs to keep up with production. Raw materials and their fluctuating costs should be a part of the production plan. If you have effective working capital management, your business should not experience shortages of raw materials. The only reason production should ever be slowed is if demand has slowed.
3. Prompt Collections and Payouts
Your accounts receivables must be collected on time to keep cash flowing. Payouts must also be completed in a timely manner to avoid any backlash from critical vendors. That being said, take advantage of the terms you negotiated with your suppliers by completing payouts as close to the due date as possible. This keeps money in your cash flow for longer, as a precaution.
4. Quick Sales
Ideally, your business sells goods as soon as they enter inventory for optimal working capital management. Since that is not always the case, quick turnaround should be something your business constantly strives for. It maximizes cash flow and increases working capital. Implementing promotions, bundling products and upselling are a few techniques to help quicken sales.
5. High Liquidity
Liquidity is the availability of cash: in other words, liquid assets in your business. Promote high liquidity in your business with some of the above recommended strategies, like holding onto payables for the maximum of your suppliers’ agreed terms. It is an effective working capital management strategy to include consideration of payment terms – not just cost of goods – when evaluating which vendors to work with. Having extended terms flexibility is a valuable working capital management tool and should become a standard part of your vendor negotiations to increase your business liquidity.
In summary, it is not enough to have “enough capital” if you don’t have strong working capital management discipline. No matter how much you have, your business will not run smoothly without the right rigor around how inflows and outflows are planned. Casual working capital management – or lack thereof – will always lead to missed opportunities to invest in your business’ success.
No matter how well capitalized your business, you would likely benefit from a low cost line of credit to cushion your cash reserve and boost your working capital, as needed. Most companies experience the occasional cash flow gap, which prevents them from taking advantage of growth opportunities. You can qualify for a Behalf purchasing line of credit to fund production, inventory, and large business purchases. There is no cost to maintain your account, so you can have working capital on demand risk-free. For every vendor payment you make with your Behalf purchasing line of credit, you can enjoy payment terms up to six months at affordable rates. It’s time to tap into your full business potential.