Do you have plans to expand your business? To put those plans into action, you would need a steady flow of working capital. But what is working capital and how can it be optimised for smooth functioning of your business? Read on to know!
What is Working Capital?
Working Capital is the measure of a company’s liquidity, efficiency and overall health. It takes into account cash, assets, inventory, accounts receivable and payable, debts due within one year, cost of hiring and training new staff. Simply put, working capital is money available to a company for everyday operations at any given point of time in a year.
If a company is not able to maintain a steady flow of operating capital, the business is at risk. The business is likely to face hardships in attracting investors, ensuring smooth flow of day to day operations and consistent growth. On the other hand, if a company is financially healthy and operating capital flow is maintained, it is an indicator that the company is efficient and growing. Therefore, it becomes vital to closely monitor your working capital.
The primary aim of optimising a company’s working capital is to ascertain that enough cash is maintained for daily operations. Since working capital measures the efficiency and short-term financial health of a company, it is of utmost importance for small business owners to have positive working capital for operating successfully.
Here are some ways in which a small business can optimise its working capital:
1. Keep Your Inventory In-check: Inventory planning is a significant factor in avoiding negative effect on revenue. Maintain just the right amount of inventory as overstocking can shoot up your costs. Keep a close tab on your stock and optimise it so that it doesn’t become obsolete over time. It will ultimately assist you in building the running capital for your small business.
2. Speed-up Your Collection Process: Set clear terms of payments, offer multiple payment options and stay on top of your bills receivables. You can also incentivise customers who pay on time. Identifying defaulters early and taking action will prevent your receivables from turning into bad debts. Avoid transacting with customers who have a history of defaulting.
3. Choose Vendors Wisely: Discounts from vendors will help save money which can be utilised in your everyday operations. Additionally, maintain a good relationship with them as it helps in receiving some leniency when your company is going through a cash flow crunch.
4. Take Advantage of Tax Incentives: Tax incentives from the government, such as a 3-year tax holiday in a block of 7 years, can help you save money which can then be routed into the working capital fund.
For your business to thrive, use the techniques above, along with timely analysis of your fixed and variable costs to cut down unnecessary expenses, and have a clear picture of your company’s financial position at all times. Doing so will provide you with opportunities for improving your cash flow.