Working capital refers to the difference between a company’s assets, such as cash, cash equivalents, and accounts receivables, and liabilities, which includes accrued payments, employee payroll, accounts payable, interest payments, and tax. It covers a business’s short-term expenses and obligations and helps ensure operations run smoothly. And whether you’re an upcoming entrepreneur or have been in the business industry for a while now, having sufficient working capital is essential.
Essentially, the more working capital your business has, the more it is ideal for your company’s overall financial health. For one, you can better support your team and business operations even when you encounter cash flow issues.
With that, here are some ways you can unlock working capital for your business:
Consider Getting A Business Loan
Getting a loan is one of the most common ways to raise working capital for your business. In this approach, a financial institution or lender will grant you the amount you need for your business. Your loan agreement will indicate the terms, payment schedule, and interest rates.
Business loans can either be secured or unsecured. Secured loans will require you to pledge collateral, such as personal property or other valuable assets the financial institution or lender can repossess if you fail to repay the loan. On the other hand, unsecured loans don’t need collateral. However, to qualify for this, you need to have a high credit rating. However, since this type poses increased risks on the lender’s side, they may charge a higher interest rate.
Improve Invoice Collection
Overdue or slow-paying invoices and late payments can significantly impact your business’s finances. Fortunately, there are many ways you can improve collections from customers or clients who owe you money for goods or services rendered. For one, you can automate payment monitoring and accounts receivables. This way, instead of having to manually track down delinquent accounts and follow up with them until they settle their invoices, you can leverage modern tools to streamline financial transactions with your clients.
In addition, you can also turn unpaid balances into working capital with small business invoice factoring. In this approach, a factoring company will purchase your overdue invoices at a discounted rate. But aside from allowing your company to obtain cash quickly and efficiently, the factoring company will also collect the pending invoices on your behalf.
Minimize Business Expenses
Reducing business-related costs is another way to unlock working capital for your company. If you can find ways to cut back on expenses, it can help free up more money so that you can reinvest in business growth opportunities.
As a good start, you can look at the different functions within your company. For instance, your marketing. Assess your current campaigns and determine which ones you’re investing a lot of money in and whether or not they’re generating good results. This way, you can be in a better position to revisit your marketing strategies and allow you to take the best approach that’ll benefit your company and your finances.
By reducing liabilities, you aren’t only improving your business’s bottom line but also freeing up resources to boost your cash flow.
If you have business assets such as vehicles, computer systems, office supplies, and other equipment that aren’t essential for running your business anymore or seem outdated, consider selling them. While this might sound counterproductive, as selling assets can mean taking money out of the company instead of adding more to it, this can be an effective way to access working capital if done correctly.
For instance, you could sell an old car or van and use the proceeds to purchase a new one that is more fuel-efficient and better suited to your needs as a business owner. Or perhaps, your business can shift to digital practices and eliminate office printers and papers. You can save a lot of resources by eliminating printing documents.
Manage Inventories Efficiently
Inventories, in the form of raw materials or finished goods, can take up a significant share of a business’s working capital. Essentially, by purchasing inventories, your capital is locked since you can’t use it until you sell these goods. And while it’s generally considered an asset since it can generate income for your business and provide economic benefits, it can also be a liability, especially when not managed efficiently.
For instance, having too many supplies on hand can lead to waste. This can affect your business’s financial health since, aside from not gaining profit from them, you may also have to shell out more resources to replace the spoiled goods. In addition, having excess inventories could also lead to more costly warehouse or storage costs.
Alternatively, reducing your inventory could be better since it can affect your operations, slow down your sales, and affect customer satisfaction. And in some cases, there could also be a price surge in supplies, resulting in costly restocking of your inventories.
That said, forecasting the demands and trends in your business niche can go a long way in ensuring you don’t overstock or understock supplies. Auditing your inventories and using tools or management systems can also be a smart approach to managing your inventories efficiently.
Working capital is an essential component to ensure your business is running smoothly. Whether you’re launching your small business or looking to scale your company, having good working capital can help ensure your venture’s success. And as a good start, you can consider the insights discussed above.