Managing your working capital wisely is essential in successfully growing your small business. What exactly is working capital? It’s the difference between your company’s assets and liabilities. The goal is to have more assets than liabilities, which gives you more flexibility in covering operational expenses and preparing for growth.
Here are three ways to optimize working capital for your business.
1. Be Smart With Your Inventory
If your small business relies on products, whether to sell upfront or use for your services (like a restaurant), it’s important to manage your inventory well. Having too much inventory eats up your working capital and can take up pricey space in your warehouse or store. Not having enough can cause you to miss out on large orders requiring a quick turnaround. Stay on top of your stock levels and research the best way to forecast needs for your industry. That way every dollar is being put to work purposefully for your business.
2. Stay on Top of Receivables
Getting paid is hugely important in keeping your working capital positive. If you have customers that are slow to pay, create incentives for speedy payment. Incorporate an automated reminder process so that you don’t have to manually call people. While you still want to stay on top of customer relationships, you also have to make sure you’re staying on top of your company’s accounts receivable.
3. Prepare for Financial Emergencies
Keeping your working capital in check is also necessary for prepping for financial emergencies. No matter what kind of business you run, a rainy day is sure to hit at some point. It could be a bad batch of goods from your overseas manufacturer or a broken water line in your retail store. The point is, you need to set aside an emergency fund as part of your working capital strategy. As you grow your business, be sure to balance your investment in company growth with having cash on hand in case disaster strikes. That way, you can keep your business afloat with positive cash flow at a low point.
The Bottom Line
Smart money management can lead to a robust working capital plan for your small business. If you fall short at some point, a working capital loan can help bridge the financial gap until you reach better times.