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Calculum Inc

10 Effective Ways of Improving Your Working Capital

June 21, 2022
Read time:
12 min

Calculum Inc

Press kit

March 5, 2020
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Having proper management and close monitoring of finances is a significant component of a successful business. With that being said,an important constituent of your finance is the working capital,which is nothing but the amount you have to meet your current business expenses.

The improvement of working capital is crucial to the smooth execution of business processes. It is because your working capital may expand to the revenue of multiple months and its improvement can free up the cash for you.

But, the question is, how do you improve your working capital? This article covers the ten practical ways to improve your working capital. Let’s dive in.

1. Reduction of the current financial liabilities of your business

This is one of the foremost steps you can take to improve your working capital situation. Following are some of the points you can follow to reduce your liabilities:
   • Pay off the liabilities that are adding more interest to the cost of the execution of business processes.
   • Automating the regular payments to not get penalized for missing on them or having delays in it.

2. Attaining the balance in inventory management

Technically, inventory is considered an asset of your business, but you cannot rely on it to pay your current liabilities in every situation. The liquidity of the products is linked to your inventory, for example having high liquidity can reflect an inability to fulfill the product demand. But, having a large inventory isn’t effective as well because it adds up to the storage costs.

By balancing your inventory, you can improve your working capital to a great extent. Following are the two main tips you can utilize for better inventory management:
   • Digitizing the inventory management system - This method does require an upfront investment. However, it saves you from the recurring costs of managing and tracking orders, along with the reduction of business interruptions.
   • Setting the time limit for a product to stay in inventory - By having a time limit associated with each of the products, you will be able to attain the balance between the goods in inventory and the production of new goods.

3. Performing checks on customers

Your customers form an important basis of how your financial loop is going to look in a matter of a few years. Therefore, whenever you take on a new client, it's essential to perform a few quick checks on their credit situation to ensure that the client will be able to make timely and complete payments. Following are the points you should check for each client to avoid future problems:
   • Reviewing and analyzing the credit risk of your customer.
   • The political and financial situation of the client’s country (for foreign clients), as they can mark a huge impact on the client’s finances as well.

4. Reduction of expenses

The reduction of expenses is another significant factor to improve your cash flow. However, when it comes to budget cuts, numerous companies make the mistake of sudden and huge cuts, ignoring the employee’s interests or essential equipment requirements, posing long-term losses. Therefore, to reduce expenses, you can start with any of the following:
   • Ask for discounts from the vendors.
   • Postpone the purchase of big asset investments, wherever possible, without disrupting the major workflow.

5. Increment your sales

Cutting down costs can hold a significant advantage in improving working capital, but can be almost impossible at times. And, this is where you need to bring in the idea of generating more sales. The higher revenue will automatically improve your working capital.

The incrementation in sales is usually considered a most difficult task. However, in certain situations, small investments in sectors like online advertising, social media campaigns, and experimentation with new markets can generate a good enough revenue for you to balance the working capital equation.

6. Get timely payments to reduce the bad debt

Bad debt, in simple terms, is unrecoverable debt. The most basic cause of bad debt is unpaid invoices. Having timely payments can assist you in not only improving your working capital but having sustainable growth in the long term. Following are some of the methods you can implement to get paid on time:
   • Reward your customers for timely payments in the form of a discount or a bonus deliverable.
   • Penalize your customers with a late fee for the delayed payments. (Ensure to have this in the contract signed by the customer as otherwise, it can suppress your relation with clients).
   • Make the system of getting payments easier and more automated.

7. Inclusion of data analytics

In present times, relying on guesswork or manual systems for decisions and processes is not a wise choice. Therefore, the inclusion of data analytics stands significant as it allows you to make informed and intelligent decisions, putting you ahead of the competitors.

Although the initial setup of including data analytics could be effort-demanding, it gets easier with automation and provides a lot more benefits. Therefore, an automated data analytics system can help you keep track of finances in terms of incoming and outgoing amounts to identify even the smallest of gaps that can ultimately improve the working capital.

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What is working capital?

Working Capital is the difference between the current assets and liabilities of a company. It represents the amount you have in hand to pay the current liabilities to keep your business processes up and running on a day-to-day basis.

How to calculate working capital?

To calculate working capital, simply subtract your current liabilities from your current assets.

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8. Negotiation for better payment terms

In business, it's always essential to be able to negotiate for improved processes and performance. One of those significant areas where this negotiation stands useful is payment terms with suppliers.

Regularly reviewing the current payment terms and seeking the opportunity to ask for better adjustments can put your business on the right path.

Increasing the length of payable cycles can assist you in numerous ways when it comes to payment terms. This will also improve your working capital. However, the necessary condition is that all the terms on your end are also met religiously to avoid any contradiction or dispute.

In addition to that, always remember that sticking to some suppliers, even when they are not serving your business in a better way, isn’t a wise decision. Be open to change, but after doing complete assessments of involved risks and benefits.

Conclusion

The improvement of working capital holds immense benefits in various directions of the business. In this article, we covered some practical ways of improving working capital, along with the steps to execute them.

The methods covered in the article include the reduction of the current financial liabilities, attaining balance in inventory management, not financing your fixed assets with working capital, performing checks on credit and public records of customers, reduction of expenses, incrementation of sales, avoidance of bad debt, the establishment of good relations with the suppliers, the inclusion of data analytics, and negotiation for better payment terms.

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