7 Smart Ways to improve your working capital structure

Working capital is critical at every business stage, from purchasing materials to closing the sale cycle. It is a cycle that helps a business grows consistently. It is money that a business has to counter any business need. It may include paying your employees or processing new order costs.

A deficit in working capital means loss. Many small businesses selling goods encounter issues like- late payments from clients. Every business requires cash flexibility and consistency to pay the dues to suppliers and other people involved.

Late repayments from clients delay the process and business growth. Small businesses often rely on external cash facilities like loans to bridge them. It helps them close any needs before invoice clearance. It is important when you have bills to pay and projects to manage with a deadline.

Facilities like working capital loans for small businesses help you attend the move without any further delay. You can use the money now by providing the strength of your business consistency and pay it later in instalments.

There are ample ways apart from external facilities like cash loans to ensure productive working capital and business. The blog talks about the same.

How to optimise your working capital for growth?

With a good working capital model, you can monitor business wages, accounts payable, facility costs, and hiring scenarios. In turn, you can earn the trust of the stakeholders and win over investors. Here are a few things you can do to improve your working capital apart from leveraging loans:

1) Analyse the total capital you need

The total working capital you need depends on a few aspects: business type, operating cycle, and business management goals. If not analysed, the business may soon run into negative working capital, where liabilities get higher than the assets/capital available.

It is a threatening situation for any business. You can calculate your working capital by dividing total assets by liabilities. If your result is higher than 1.5%, it reveals working capital growth.

2) Shorten the business operating cycle

Every business involves minimal middlemen to optimise the business operational costs. However, eliminating the redundant process or finding a cost-efficient substitute is challenging.

You can improve your business cash flow by reducing the costs and processes involved. Analyse your production and distribution chain.

Check the feasibility of removing a procedure if it contributes little to the business growth. For example, you can reduce – confirmation emails, switch to advance payments and reduce billing terms to fasten up the process.

3) Know your customer’s financials

A business prospers with expansion into different markets and new audiences as customers. However, before you take on a client, analyse the financials and the prospect’s creditworthiness. The due diligence will help you stage up in business with timely payments. You can avoid a crisis if you have even 5-10 clients that pay on time.

 Review a client’s credit report and aspects like payment history, tax liens, or bankruptcy. However, for foreign clients analysing the default risk could be high.

Here, you would need an expert to help you ensure a practical strategy for international trade. If you know someone that can help you with credit research, you can grow by reducing unnecessary risks.

4) Check whether you qualify for Trade Credit Insurance

It is a way to multiply your working capital. It protects your business from the fear of non-payment or late payments on the accounts receivables. If you qualify for Trade credit insurance, you can:

  • Free yourself from tracking bad debts
  • Protect your capital
  • Ensure a better cashflow
  • Secure your revenue along with providing better credit terms to your customers

Apart from late payments, trade credit insurance covers- customer bankruptcy, political risks, natural disasters, and other reasons.

However, it is not ideal for every business. If your business often faces issues like- the impact of a volatile economy, having less secure terms for customers, and a large business with minimal debtors.

If your business is new or is in the initial stages of ensuring the best customer policies, an invoice finance broker can help.  He can help you provide the personalised quote from the right lender that can provide the best value for your unpaid invoices.

In invoice financing, you can borrow against your unpaid invoices. It acts as collateral on the loan. Usually, there are no interest costs involved.  The lender pays a portion of the invoice for your business needs and takes a fee.

You can use it if you want urgent money or your business needs, but clients have delayed the payments.

5) Reduce bad debt

Uncollected receivables are natural with any small and medium-scale businesses. As working capital includes liabilities and assets, higher liabilities imply low working capital. It is the right time to reduce bad debt by analysing your repayment capacity or consolidating some debts.

Check whether you can qualify for reduced interest rates with refinancing or not. If yes, it can positively add to your credit history and score. Freeing up working capital implies selling more goods and more profit. It will eventually help the business grow consistently and ensure surplus capital.

6) Automate the business financing process

Managing the business manually can be time-consuming and labour-intensive. It requires you to hire people who can do the work better and in a minimal time. The best way to do so is by automating the process.

It would be a smart way to reduce redundancy and improve accuracy and efficiency. You can automate client payment reminder emails and track cashflows conveniently with every purchase.

Introduce a separate invoice platform if you have a marketing team and tech specialists. Provide more options or gateways for customers to conduct payments. You can launch freebies for customers paying within 7 days of receiving goods. It would not only help you gain genuine and more customers but optimise your invoice cycle.

7) Work with vendors offering good discounts

 Establishing good working relationships with your vendors would help you gain their trust and grab some amazing discounts. The late payments impact the payments you need to make to the vendor. Pay their monthly dues in advance and ask for a discount in exchange. It would help you save money on founding new vendors with higher rates.

Bottom line

Working capital should be the prime aspect of any business. If you experience low sales, delayed client payments, and insufficient capital, the tips will help you eliminate such issues. Be proactive in taking quick business decisions.

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