How well you manage your small business’ working capital is a good sign of how well things are going for your firm in general. A company that can keep its accounts payable and accounts receivable moving smoothly is also likely to turn a good profit. If you feel like your company’s working capital process could use some help, take a look at the following suggestions.
1. Reevaluate Your Working Capital Needs
While the economy is still making its way back to normal, things are much better now than during the Great Recession. During the financial crisis, businesses had to carefully protect their working capital and other assets to avoid the bankruptcy fate of many of their competitors. That meant saving instead of spending and scaling way back on inventory. Now that the markets have begun slowly to pick up again, it may be time to reevaluate the current working capital needs of your company. You may be able to operate again with fewer reserves, spending more on inventory because your orders are coming in more frequently. Managing your working capital effectively may actually mean reducing your cash on hand at any given time.
2. Find the Best Uses for Your Capital
There are bad, good and better uses for your working capital. The specifics will depend on the nature of your business, but the key is to make sure that you are putting your money to the best use possible, namely the ways that maximize your profits. Things like paying dividends to stockholders, making acquisitions, or making long-term stock repurchases are not the best ways to use your capital. They limit your cash on hand needed to handle the daily fluctuations. Better uses might include building up more inventory or adding a new product line.
3. Maintain flexible repayment terms
A very important part of keeping your working capital flowing smoothly is being able to maintain somewhat flexible repayment terms. Some months it may be necessary to stretch out your billing date by a week or two or more. Treating your suppliers as you would want to be treated will help them trust you and be willing to offer you flexibility in difficult times. That means being as responsible and timely as possible.
With the help of these tips, you will hopefully be able to take charge of your working capital to make sure it is working well for you.