All companies should first focus on working capital management before considering any form of financial assistance. The efficient administration of inventory control, accounts receivable and accounts payable are of utmost importance. If done right, improved working capital management will generate additional cash to sustain operations and fuel growth.
The following are the most common work practices that can improve cash flow and increase access to working capital:
1. Ensure shorter operating cycles
Issue invoices as soon as possible to reduce your company’s average collection period. Delayed invoicing will translate into postponed income and poor liquidity.
2. Conduct thorough credit checks on customers
Before taking on a client with substantial business, run a credit check. Ensure your customers can afford to pay their bills and have a healthy payment history. Consider lowering credit limits for new customers.
3. Limit unnecessary expenses
Examine your budget and break it down to its components. Identify the expenditures that maintain your functionality as a company and reduce the non-essential cash spending that could instead be used to further fuel your working capital.
4. Collect outstanding invoices on time
Closely monitor all past due accounts. Send out reminders during the collection period and inquire immediately if payments are delayed. Experienced accounts receivable professionals can prompt customers for timely payment while maintaining positive customer relations.
5. Leverage your accounts payable
While you want to collect your accounts receivable as quickly as you can, you should delay your accounts payable as much as possible without compromising your supplier relations or credit score. Using wire transfers to complete your payments on the very last day they are due is an effective tactic to improve cash flow. Take advantage of any vendor discounts and renegotiate payment terms once you become a loyal customer.
6. Increase sales revenue
Focus on expanding your sales efforts and exploring new marketing channels. Base pricing on a carefully examined balance between profit margins, competitive rates, and market demand.
7. Avoid stockpiling inventory
Every unsold item in your inventory is essentially a stack of money sitting on the shelf, not being used. To ensure maximum cash flow, time your supplies and products to arrive exactly when you need them before quickly pushing your product or service out the door.
When you develop work practices and organizational efficiencies to improve working capital management, you are establishing a firm base for your company’s fundamental financial health and longevity. Maintaining a solid balance between growth, profitability and liquidity is a hallmark of business success.