Did you take a loan or grant for your company? Or your business is strapped for cash? If YES, here are 20 best tips on how to manage working capital effectively. As a business owner, one of the major lessons that you must ensure you learn before launching your business is how to manage your working capital effectively. It is one thing to have robust cash inflow in your business and it is yet another thing to know how to effectively manage the cash flow.
Recent studies conducted on why most businesses fail show that inability to effectively manage working capital is one of the top three reasons. This goes to show the importance of working capital to a business. As a matter of fact, working capital is considered to be the life-blood of any business.
The truth remains that any successful organization you see is an organization that has overtime mastered the art of managing its working capital. No business survives if the management is unable to properly manage its working capital. So as an aspiring entrepreneur or a business owner who desires to build a business empire, you have to pay serious attention to these tips on how to manage your working capital effectively.
20 Best Tips on How to Manage Working Capital Effectively
Take Accounting and Book Keeping Courses
The first port of call when it comes to effectively managing your working capital as a business owner is to take accounting and book keeping related courses or training. The only reason why you should not heed to this advice is if you are an accountant or you have an accounting background prior to starting your business.
The truth is that no matter your field of study or the industry your business is domiciled in, you would need accounting skills amongst other skills to be able to effectively run the business and manage your working capital.
Make Use Appropriate Accounting Software
The second thing to do when it comes to managing your working capital effectively is to run your business with the appropriate accounting software. With a good accounting software, you will be able to manage not just your working capital, but the cash inflow in your business. One good thing about accounting software in managing your working capital is that it is easy to understand and use if you pay attention to it.
You can choose from a host of accounting software like FreshBooks, Xero, Zoho Books, Sage Intacct, QuickBooks Enterprise, Brightpearl, NetSuite ERP, Happay, SAP Business One and Microsoft Dynamics GP amongst others. Just get their trial version so as to study them to know if it is suitable with your business.
Let me clearly state here that no matter the knowledge you have when it comes to managing your working capital effectively, if you are not disciplined it will all amount to nothing. Discipline is what you need to be able to say no when you are tempted to use your working capital to sort other pressing needs. The truth is that if you continue to use your working capital to sort out other needs or spending it just as you wish, it won’t be too long before your business folds up. It takes a person of discipline to delay gratification.
Create Budget for Your Business
Another very important tip you must adhere to if you truly want to effectively manage your working capital as a business person is to ensure that you have a budget for running your business. No doubt it is one thing to have a budget for your business and it is entirely another thing to work with the budget; but the starting point is to ensure that you have a budget for your business if you don’t want to deep your hands into your working capital.
Strictly Follow Your Budget
Once you are able to create budget for your business, the next thing that you need to do in order to effectively manage your working capital is to ensure that you strictly follow your budget. The truth is that if you do not follow your budget in running your business, you are likely going to encroach into your working capital.
Take for example, if your budget for staff salaries only cover 3 staff and you decided to hire 2 additional staff, you are likely going to over shoot your budget and in most cases, you will get the money from your working capital and that will likely affect your business.
Run a separate business account
It advisable to run a separate business account if indeed you are serious about managing your working capital. If you run your working capital on a separate account, it will afford you the opportunity to give a standing order on withdrawal from the account only when you need to pay for goods purchased or the running cost for the business.
Minimize Credit Facility Extended to Customers
As a business owner, if you don’t have a limit on the credit facility that you make available to your customers, then your business will get to a stage where you will struggle to generate enough capital to restock. For example, if you run a spare part shop and your working capital is $10,000 monthly (covers both restocking with spare parts and the running cost for the business).
If you go ahead to give credit facility to the tune of $7,000 monthly, it will definitely affect your working capital because you will struggle to gather the required capital to purchase goods for your store. So, if indeed you want to manage your working capital effectively, then you must ensure that you minimize to the barest minimum the credit facility that you extend to your customers.
Enforce Effective Credit Control Measure
No doubt, a business can hardly survive without offering credit facility to customers, as there are customers who would only do business with you when you offer them credit facilities. The only way you can effectively manage your working capital if you are offering credit facility to your customers is to ensure that you enforce effective credit control measures. With effective credit control measures, it will give you the leverage to collect your money from your customers as at when due especially from defaulters and slow paying customers.
Leverage on Factoring
If you are looking for tips on how to effectively manage your working capital, then you need to leverage on factoring. The term factoring simply means a short-term financing option to increase a business’ liquidity. Operators also purchase accounts receivable and unpaid invoices at a discount in return for immediate receipt of money. Factoring has been proven as one of the best ways of funding the working capital requirements of a growing business.
Maximize Credit Facility from Your Suppliers
Another potent tip if you truly want to effectively manage your working capital is to ensure that you maximize credit facility offered by your suppliers. The truth is that if you get goods on credit and you are able to sell the goods as at when due, it means that you will make your profits and pay back your creditors (suppliers) without committing your money (working capital).
Work with Your Bank
In the bid to win customers over and keep them, banks usually come up with packages that will assist small businesses and entrepreneurs. One of such packages could be helping their clients who are business owners to finance their supplies.
As a business owner, if you want to effectively manage your working capital, then you should discuss with your bank or professional financial advisors to know if there are better ways of funding your purchasing through trade finance (such as letters of credit) without putting a strain on your liquid working capital.
Reduce Cash Requirements in Running Your Business
Another workable tip that you need to adopt if you want to manage your working capital effectively is to try as much as possible to reduce cash requirements when it comes to running your business. Take for example, keeping as many overheads as variable as possible, managing stock holding to ensure that cash is not tied up in slow moving stock, or simply looking at reducing the monthly expenditure will go a long way to help your business and your working capital.
Hire Financial Experts
It is good to have ideas on every aspect of your business as a business owner, but it is profitable to hire experts to handle core areas of your business especially as it relates to effectively managing your working capital. There are financial consultants out there who are trained to help organizations manage their working capital.
Although as a small business cum startup, you may not have the extra money to pay professional financial consultants to help you manage your working capital, but if you run a medium scale or a large scale company, it becomes important to hire a competent financial expert with background in financial management.
Effectively Manage Your Procurement and Inventory
Another workable tip that you need to follow if indeed you want to manage your working capital effectively is to ensure that you put measures in place that will help you effectively manage your procurement and inventory. Judicious inventory management is an important factor when it comes to maximizing your working capital.
In its simplest term, it’s important to keep track of what you buy, just as much as what you sell. If you don’t know the stocks that you need in your store per time, then your business stands the risk of experiencing loss in sales as a result of a shortfall in supply. Investing in procurement automation solutions can help you effectively manage your working capital.
Pay Your Vendors as at When Due
If indeed you want to effectively manage your working capital, then you must ensure that you pay your vendors as at when due. The truth is that companies that pay their vendors on time build better relationships with their suppliers and are in a stronger position to negotiate better deals, payment terms and of course discounts.
If you maintain better working relationship with your vendors, it could save you money in the long run when it comes to getting larger discounts for bulk purchase, recurring orders and maximizing the credit period. A breakdown of working capital levels shows that the biggest improvement comes from improved payables performance and reduced days payable outstanding (DPO).
Manage Your Debtors Effectively
Another tip when it comes to managing your working capital is to ensure that you effectively manage your debtors. The truth is that if you use force on your debtors, collecting your money back may take a longer period than expected.
Just ensure that you are diplomatic when it comes to collecting your money from your debtors and you will have your working capital intact. Of course there will be perpetual bad debtors, but ensure that you try as much as possible to reduce bad debt. In order to minimize your bad debts, you should implement more rigorous credit checks and ensure that effective credit control procedures are in place to chase late-paying debtors (customers).
Source for Cheaper Deals
Do you know that you can indeed maximize your working capital by getting good deals? Yes, you can indeed maximize your working capital by ensuring that you purchase your products from manufacturers or wholesalers who are ready to give you good discounts.
For example, if averagely it will cost you $5,000 to purchase 50 of the products you retail, and you can as well negotiate with a supplier to give you same number of products for less than $5,000 say $4,750. Somehow, you have been able to save $250 on your working capital.
Make Informed Financing Decisions for Your Business
Making informed financing decisions for your business is yet another tip that you need if indeed you want to manage your working capital effectively. If you continue to make bad financial decisions as it relates to your business, it will impact negatively on your working capital. As a matter of fact, as a business owner, it will pay you to consult one or two persons before committing your money to any deal or investing your money.
Avoid Impromptu Spending
If as a business owner you indulge in impromptu spending, then it won’t be too long before you run out of working capital. If indeed you want to effectively manage your working capital as a business owner, then you must ensure that you avoid spending money impromptu. You should be disciplined enough to only spend money that you budget for.
Carryout Appropriate Cash Flow Forecasting for Your Business
Another effective means of managing your working capital is to always carryout appropriate cash flow forecasting for your business. Having a full grasp of your business means that you should be able to give an estimate of cash inflow for at least a month. This is possible if you have successfully studied the pattern of your business. With that, you will be able to make plans and manage your working capital effectively
Make Room for some Unbudgeted Expenditure
As a business owner, there are situations where you will need to spend money that you did not plan for and in some cases, such spending can help boost or mar your business. Just ensure that you work on your skills as it relates to effectively managing uncertainties and you can achieve this by preparing risk management procedures. The guiding principle here is to ensure that risk management procedures are established based on the realistic and objective view of your working capital needs.