How to improve working capital in your small business
The cash available to cover daily expenses after all incoming liabilities having been met is arguably the most critical element of working capital, especially for small businesses. Substantial working capital does more than keep your business succeeding; it enables you to flourish as it can fund your next stage of growth.
No one approach will work across all business types regarding your needed working capital. This total can, however, be determined through the use of comprehensive accounting services, as a trained accountant will consider your business type and financial goals.
For example, a business that relies on holding a large amount of stock will have very different outgoing costs compared to a software company. As a result, determining the ideal amount of working capital will involve identifying your business’s financial commitments and the timings thereof. Our team can assist by assessing your working capital ratio, a total calculated by comparing your total current assets to current liabilities. The higher this ratio, the better your business’s working capital. As a yardstick, your ratio should be comfortably in excess of 1:1, to avoid working capital being negative.
Boosting your working capital involves increasing or decreasing one end of your working capital ratio. For example, reducing the money going out of your business or increasing current assets. Our experts recommend these tactics for managing your outgoing cash flows:
- Streamlining Inventory – Evaluate current product stock to determine whether there is a way to lower purchasing totals.
- Assess Suppliers – Doing valuable supplier research can yield desirable cost-saving results that do not compromise your product or service quality.
- Improve Debtor Relationships – Negotiating shorter payment terms can improve cash flow. This can be fuelled by incentives to ensure that your business is paid what it is owed on time.
- Prioritise Financial Accounting – Ensuring that liabilities are fulfilled when they are meant to will improve the reliability of your cash flow.
- Increase Revenue – Introducing a new product or service add on to your target market can help increase your business’s revenue, which will improve working capital.
If the above suggestions are not realistic for your business’s current financial status, or if you are looking for a higher, quicker cash flow boost, business financing may be a suitable consideration. Many business owners are hesitant to take on debt, though, with a clear financial plan, there is no need to fear business finance. This boost will enable your business to implement strategic improvements to drive your success.
The financial support you could consider includes:
- Bank Overdraft
Overdrafts allow your business to access more cash than is currently available, which can be helpful to implement strategies that improve overall working capital. However, these overdrafts should be used wisely as they still incur interest.
- Business Loan
The first business finance solution most owners consider are business loans. They are a suitable and fast solution to successfully fund new projects requiring a large sum of money upfront. However, these loans should be considered carefully to ensure that the project or improvement they fund is financially viable.
- Invoice Finance
Invoice financing (also known as factoring) involves receiving the money owed to your business upfront for a small fee whilst your clients pay back their share to the factoring creditor. This financial product facilitates quicker access to funds due from customers.
There are various options for improving your business’s working capital, though they all begin with assessing your incoming and outgoing finances, to understand the drivers of the working capital in your business. Understanding your business’s finances is key to streamlining cash flow – which is where our team can assist.