Guide to Working Capital Management
A Business Owner’s Guide to Working Capital Management
There are a lot of aspects of your business that you are going to have to manage, but perhaps none is quite as important as the management of working capital. If you are new to the world of business, you might not know the first thing about how to manage this important aspect of your company. The first thing you need to understand is what exactly working capital is.
To put it in simple terms, working capital refers to the money that a business uses to finance its daily activities such as the procurement of goods, paying bills and the like. In order to calculate your working capital, you need to subtract your current liabilities, which is the money that you are supposed to spend on certain things, from your assets, which is how much money you have in the bank.
Working capital is essential if you want to be able to keep your business up and running. A business can run while losing money for quite some time, but if you run out of working capital, you are not going to last very long at all. Here are some tips to help you manage your working capital.
Make It Your Responsibility
If you are new to the world of business, you might think that managing working capital comes under the umbrella of finance, so you might end up leaving all of the work to your finance department. However, you need to take personal responsibility for the management of your working capital. Once you have started doing so, you need to take things one step further by getting your entire management team in on it.
Essentially, every member of your management team should know what kind of financial constraints they are going to be under while they are working on their projects. An all-too-common problem that occurs is that members of your management team use up too much working capital or they do not follow the instructions given by your financial team, which ends up causing a shortage in capital that could potentially stop your day-to-day operations in their tracks.
Make sure that you hire specialists who have in-depth knowledge of how working capital works as well so that they can advise you and ensure that everything goes as smoothly as possible. You can also have these specialists hold seminars and the like for the rest of your management team so that everyone can manage working capital like a team rather than leaving it to a remote group that just crunches numbers.
Keep Good Relations with Suppliers
One of the biggest drains on your working capital will be your suppliers. Hence, it can be rather tempting for you to delay payments so that you have more working capital in the bank for future use. However, bad relations with your suppliers could result in problems when you are actually short on working capital. If you pay your suppliers on time, they are going to be far more likely to agree to discounts and potentially waive certain payments in extreme situations.
Basically, you need to ensure that your business is in a good position to bargain, and this would involve spending some of your working capital in the short term. This may seem counterintuitive, but what you need to realize is that long-term gains often involve some immediate spending. Essentially, what you need to do is treat your suppliers like contacts that you can use to improve your working capital situation at any given time.
You also need to be smart about the suppliers you actually work with. Don’t just go for the cheapest supplier just to save some money, as this would usually result in you getting subpar products. Cheaper supplies could result in your productivity going down. After all, if you don’t get good printer ink, your printouts are not going to come out very well, which could result in your work looking unprofessional. This could go on to make clients think poorly of you and your company. As you can see, trying to save money by going for cheaper suppliers results in a spiral that can be difficult to come back from.
Thus, in short, what you need to do is choose good suppliers regardless of the price and make sure you pay them on time. This will pay dividends for your business in the long run.
Sweat the Little Things
A good personal philosophy to have in life is to ignore the little things that might cause you annoyance here and there. This might serve you well in your life, but it would be disastrous if applied to the day-to-day activities of your business.
People often tend to ignore tiny expenses and spend money in small amounts with abandon. This may not make much of a difference in the short run, but as time goes on, these expenses are going to pile on and would eventually become an enormous burden on your company.
Hence, you need to sweat the little things without a doubt. Scrutinize every single expense, even those that do not seem like that big of a deal at that particular point in time. Over time, you are going to find that your working capital is a lot more than you thought it would be, and this is all from the money you have saved from avoiding small expenses. Remember, it is important to be as stingy as possible if you want to be able to manage your working capital in the most efficient way possible.
This also involves cutting down on every expense as much as possible. When your business has just begun, you need to make sure that you only spend working capital on things that are absolutely necessary. Of course, this does not mean that you need to go overboard and start avoiding items that are essential to the running of your office. Rather, what you need to do is start buying certain things in bulk in order to save money and use other similar tricks so that when it all comes together, you have saved a sizeable chunk from your working capital, which can be used in other areas of your business.
One example of small expenses that often end up going out of control is with expense accounts as well as travel and entertainment. If you are sending an employee abroad and working capital is tight, you are going to have to ensure that they know what their limits are. Failing to do so could result in your employee spending way too much money. Once again, after a lot of employees do this, the chances are that your working capital is going to fall very short indeed in the next fiscal period.
Don’t be afraid to stamp down your authority if an employee ever ends up doing something they are not supposed to do. It may make you seem like too tough a boss, but if working capital management is a priority, sometimes the toughest bosses are needed to ensure that everything goes smoothly for the company in the long run.
Buy the Right Amount of Stock
While you are certainly not going to want to run out of stock at any point in time, one of the biggest drains on working capital is when a certain department has overstocked. It may seem like a good idea to buy a lot of things in advance, but what you need to realize is that a lot of your working capital is going to be managed on a monthly basis. Hence, if a lot of working capital is spent on a certain stock, you are going to end up with less money for various other expenses that your business is going to incur.
What you need to do is talk to your procurement department about how much stock is needed. Try to calculate the right amount of stock. Feel free to buy a little extra as well just in case, but then keep it at that. This is going to ensure that everyone has what they need and there is money left over in case any other expenses are incurred as well. Remember, managing working capital is a very long process that you are going to have to focus on a lot if you want things to work out.
Manage Working Capital Shortfalls Adequately
No matter how hard you try, it is very possible that at some point in time, your working capital is going to end up falling short of what you need. In such situations, you are going to have to make some tough decisions. One of the most important decisions you are going to have to make involves managing the shortfall by getting money from somewhere else.
One option, of course, involves taking a loan from a bank. This might seem like a good option because it is the traditional way people have borrowed money, but the fact of the matter is that it is rather risky simply because banks charge a lot of interest and can end up causing a lot of problems for you in the long run if you start missing payments.
There are a lot of alternatives that you can look into, including getting short-term capital online. This involves a much easier procedure with far fewer risks, thus making it a great option for someone who needs cash quickly to keep their business running by paying their bills and keeping the people on their payroll happy.
All of that being said, sometimes the only solution you have is to get an emergency loan. If it comes to this, one thing you are going to have to do more than anything else is to make sure you have a repayment plan. As soon as you are faced with a dire working capital shortfall, get started on loan procurement and start figuring out a way you can pay the loan back as quickly as possible. Failing to do so could result in your debt spiraling out of control which is something that could result in the end of your company for good.
Try Invoice Factoring
As soon as you send an order to your customer or client, draw up an invoice. This is essential even if you don’t expect the client to pay immediately. This is because there are a lot of avenues that would enable you to borrow almost the entire amount that is owed to you in your invoice. When you get the full amount from your client, you can use the remaining money to pay off interest.
While this would obviously mean that you are getting less money than you are owed, it is a great way to get some cash that you can use to bolster your working capital. Also, there are a lot of clients out there who are going to take advantage of you by trying to delay payments as much as possible. Borrowing based on your invoices is a great way to ensure that this does not have a long-term negative impact on your working capital since you would get a majority of the amount whether or not your client has paid up.
It is also very important that you cut off clients who do things like this because they are going to be a huge problem for you in the future. Establishing a cash flow is essential to the running of your business, and nothing will mess up your cash flow like a client who does not pay on time. There are a lot of potential clients out there, so you don’t need to waste your time with one who does not respect you and your company enough to pay for what they have bought from you in a timely fashion.