Have you taken out a loan or a grant for your business? Or is your business related to cash? here are 20 tips for effectively managing your working capital.
As a business owner, one of the main lessons you need to learn before starting your business is how to effectively manage your working capital. It’s one thing to have reliable cash flow in your business, and it is quite another to know how to effectively manage your cash flow.
Recent studies on the reasons why most businesses fail show that the inability to effectively manage working capital is one of the top three reasons. This is a testament to the importance of working capital for a business. In fact, working capital is considered the lifeblood of any business.
The truth is, any successful organization you see is one that has mastered the art of overtime of managing its working capital. A business does not survive if management cannot properly manage its working capital.
So, as a budding entrepreneur or business owner looking to build a business empire, you should pay close attention to these tips on how to effectively manage your working capital.
Top 20 Tips for Managing Working Capital Effectively
- Take accounting and bookkeeping courses
The first port when it comes to effectively managing your working capital as a business owner is to take courses or trainings in accounting and bookkeeping. The only reason you shouldn’t heed these tips is if you are an accountant or have some accounting background before you start your business.
The truth is that no matter what industry you work in or where you work as a domicile, you will need, among other things, accounting skills to be able to effectively run your business and manage your fund. rolling.
- Use appropriate accounting software
The second thing to do when it comes to effectively managing your working capital is to start your business with the right accounting software. With good accounting software, you will be able to manage not only your working capital, but also the cash flow of your business. The advantage of accounting software for managing your working capital is that it is easy to understand and use if you pay attention.
You can choose from a variety of accounting software such as FreshBooks, Xero, Zoho Books, Sage Intacct, QuickBooks Enterprise, Brightpearl, NetSuite ERP, Happay, SAP Business One and Microsoft Dynamics GP and more. Just try them out to see if it’s right for your business.
- Be disciplined
Let me be clear that whatever knowledge you have, when it comes to managing your working capital effectively, if you are not disciplined it will not do anything. Discipline is what you need to be able to say no when you tend to use your working capital to deal with other urgent needs. The truth is, you keep using your working capital to meet other needs or if you spend it the way you want, you won’t have too much time before your business collapses. It takes a disciplined person to delay gratification.
- Create a budget for your business
Another very important point is a tip that you must adhere to if you really want to manage your working capital effectively as a businessman, to make sure that you have the budget to run your business. There is no doubt that it is one thing to have a budget for your business, and quite another to work on a budget; but first you need to make sure you have a budget for your business if you don’t want to dip into your working capital.
- Strictly follow your budget
Once you are able to create a budget for your business, the next thing you need to do to effectively manage your working capital is to enforce strict adherence. Your budget. The point is, if you don’t follow your budget when running your business, you’re more likely to invade your working capital.
Take, for example, if your staff salary budget only covers 3 employees and you decide to hire 2 additional employees, you will likely overestimate your budget and in most cases you will get money on working capital. , which will likely affect your Business.
- Create a separate business account
It is recommended that you create a separate business account if you really want to manage your working capital. If you manage your working capital in a separate account, this will give you the option of giving a standing order to withdraw funds from the account only when you need to pay for a purchased item or running costs for the business.
- Minimize the line of credit granted to customers
As a business owner, if you don’t have a credit limit you will make it available to your customers and then your business will reach a point where you will struggle to get enough capital to replenish. For example, if you run a parts store and your working capital is $ 10,000 per month (covers both parts replenishment and the cost of running the business).
If you plan to provide a melodic line of credit of $ 7,000 per month, it will certainly impact your working capital as you will have a hard time raising the capital to purchase merchandise for your store. So if you really want to effectively manage your working capital, you need to make sure that you keep your line of credit as low as possible.
- Ensure effective credit control
Without a doubt, a business is unlikely to survive without providing a line of credit to customers, as there are customers who will only do business with you when you offer them credit. The only way to effectively manage your working capital when offering a line of credit to your customers is to make sure that effective credit controls are in place. With effective credit control measures, this will give you the opportunity to get your money back from your customers over time, especially from delinquents and slow paying customers.
- Leverage on factoring
If you are looking for advice on effective working capital management, you should resort to factoring. The term factoring simply means a short term financing option to increase the liquidity of a business. Operators also buy discounted bills and unpaid bills in exchange for receiving cash immediately. Factoring has been recognized as one of the best ways to finance the working capital needs of a growing business.
- Maximize your line of credit with your suppliers
Another great tip if you really want to effectively manage your working capital is to get the maximum line of credit your suppliers offer. The truth is, if you get goods on credit and can sell them on time, that means you will make a profit and pay off your creditors (suppliers) without committing your money (working capital).
- Work with your bank
In an effort to attract and retain customers, banks typically offer packages to help small businesses and entrepreneurs. Such a package can help their clients who are business owners finance their shipments.
As a business owner, if you want to effectively manage your working capital, you should discuss it with your bank or professional financial advisers. to see if there are better ways to finance your purchases with trade finance (such as a letter of credit) without straining your cash working capital.
- Reduce cash flow requirements to run your business
Another helpful tip that you should follow if you want to effectively manage your working capital is to try to minimize your cash flow requirements when needed. comes to running your business. Take, for example, keeping as much overhead as possible, managing inventory to make sure money isn’t tied to slow-moving inventory, or just cutting monthly expenses will have a big impact. on your business and working capital. ,
- Hire financial experts
It is good to have ideas about all aspects of your business as a business owner, but it pays to hire experts to manage the main areas of your business, especially in terms of effective fund management. rolling. There are financial advisers who are trained to help organizations manage their working capital.
While as a small business start-up you might not have the extra money to pay professional financial advisors to help you manage your working capital, if you run a medium to large business, it becomes important to hire a knowledgeable financial expert with experience in the field. Financial direction.
- Efficiently manage your purchases and inventory
Another powerful tip that you need to follow if you really want to effectively manage your working capital is to make sure that steps are taken to help you manage your purchases and inventory effectively. Careful management of your inventory is an important factor in maximizing your working capital.
In the simplest sense, it’s important to keep track of what you are buying as well as what you are selling. If you don’t know how much inventory you need all at once, your business is at risk of losing sales due to supply shortages.
- Pay your suppliers from the date
If you really want to manage your working capital effectively, you need to make sure you pay your suppliers on time. The point is, companies that pay their suppliers on time build better relationships with their suppliers and are in a better position to negotiate better deals, terms of payment, and of course discounts.
Maintaining the best working relationship with your suppliers can save you money in the long run when it comes to getting big discounts on wholesale purchases, recurring orders, and maximizing your credit period. A breakdown of working capital levels shows that the greatest improvement is associated with an improvement in accounts payable and a decrease in overdue days (DPO).
- Manage your debtors efficiently
Another tip when it comes to managing your working capital is to make sure that accounts receivable are managed effectively. The truth is, if you use force against your debtors, collecting the money may take longer than expected.
Just make sure you are diplomatic when it comes to collecting money from your debtors and you will have your working capital intact. Of course, there will be some lingering bad debts, but make sure you try to keep bad debts as much as possible.To minimize your bad debts, you need to put in place tighter credit checks and ensure proper credit monitoring procedures. effective credit to identify overdue debtors (customers). …
- Source of cheaper offers
Did you know that you can really maximize your working capital by doing good business? Yes, you can really maximize your working capital by making sure you buy your products from manufacturers or wholesalers who are willing to give you great discounts.
For example, if on average it will cost you $ 5,000 to buy 50 of the products that you retail and you can also negotiate with a supplier to provide you with the same number of products for less than $ 5,000, for example, $ 4,750 You sort of managed to save $ 250 in working capital.
- Make informed decisions about financing your business
Making informed financial decisions for your business is another piece of advice you need if you are serious about managing your working capital effectively. If you keep making the wrong financial decisions related to your business, it will negatively affect your working capital. In fact, as a business owner, you will need to consult with one or two people before investing in any transaction or investing any money.
- Avoid unexpected expenses
If you, as a business owner, are spending on one-off expenses, it won’t be long before you run out of working capital. If you really want to effectively manage your working capital as a business owner, you need to avoid spending unexpected money. You need to be disciplined enough to only spend money that you have a budget for.
- Perform cash flow forecasts for your business
Another effective working capital management tool is constant forecasting of your business’ cash flow. Having a complete understanding of your business means you should be able to estimate your cash flow for at least a month. This is possible if you have successfully studied the structure of your business. Thanks to this, you will be able to effectively plan and manage your working capital.
- Free up space for some extra-budgetary expenses
As a business owner, there are situations in which you will have to spend money that you did not plan to spend and in some cases such expenses can help grow or destroy your business. Just make sure that you are working on your skills as it involves dealing with uncertainties effectively, and you can achieve this by preparing risk management procedures. The guiding principle here is to ensure that risk management procedures are established on the basis of a realistic and objective view of your needs. working capital.