When it comes to financing the day to day operations of a business, the necessity of having working capital becomes apparent.
Working capital is what you are left with when you subtract current liabilities from current assets. Ensuring there is enough money to pay for raw materials, wages, salaries or even unexpected costs can be a challenge. But it doesn’t have to be.
One clear way to ensure cash flow to cover expenses is to collect receivables quickly and take a little longer to settle your payables. However, because this is the goal of most companies, and suppliers, it is not so easy to accomplish.
Business consultant, Jonathon Karelse, who has been recognized as a thought-leader in the industry, offers some tips on improving working capital.
1.Receivable incentives: By offering a little something extra for customers to encourage early payment, you can turn the hope of collecting receivables quickly into more of a reality.
2.Pay up: Make all your debt payments on time to avoid late fees and penalty charges. That money can be best used elsewhere.
3.Examine your fixed and variable costs: Investigate ways to reduce them by sorting out those expenses that are wasteful. Cut out these unnecessary costs and you will find more money in your coffers.
4.Consider your interest rates: Monitor how much you are paying in interest and examine whether you may be able to have some of the rates modified. The money you save can be used as working capital.
5.Investigate tax incentives: Analyze if you are receiving all the benefits you can from the IRS. This saved money can be used to pump up your working capital.
- Negotiate better rates with suppliers: Look over your supplier contracts and analyze whether you could work out better terms. Jonathon Karelse suggests that if you find a supplier who is not willing to work with you, you consider replacing them with one who has more favourable terms for you.
7.Use up-to-date statements: Regularly update your financial documents so you have a clear view on your company’s financial position.
Companies that struggle with maintaining their working capital can find themselves short-changed at the end of the day. This can lead to precarious situations where they need to take on debt or issue more stocks to make up the funds they need.