How to Improve Your Business’s Working Capital Efficiency
December 26, 2023
The Bureau of Labor and Statistics notes that some trends make a business more likely to fail, and lack of working capital and adequate financing is one of the top six reasons. Notably, working capital serves as a critical resource not only for business expansion and market entry but also as a vital buffer during unforeseen emergencies.
If your business needs to strengthen your working capital, identifying the right strategies can be challenging. Fortunately, there is a wide array of astute financial tactics available to fortify your business, ensuring the essential resources for resilience and the seamless continuity of operations. Let’s now delve into some of the most impactful options.
Real-time Data
“Moving at the speed of business” is a wildly popular and accurate phrase. Changes can occur with such speed that a delay of even a few hours can lead to the success or failure of any business initiative. As such, you need real-time data to make appropriate financial decisions better. This information should include:
- A cash flow summary showing your up-to-the-second cash flow.
- Future data that demonstrate future cash flow, bills, and other income and expenses.
- A breakdown of all inflows and outflows allows you to determine where to adjust.
- Potential financing options if you need additional capital.
This real-time data can inform your strategic spending decisions, particularly if your regular analysis leads to better strategic forecasting, enabling more appropriate financial decisions. With the right data, you can better plan your working capital needs and make more robust and accurate financial decisions.
Cash Flow Management
By ensuring appropriate business capital management, accelerating the collections of your accounts receivable, and engaging in a comprehensive cash flow management strategy, you can put yourself in a position to protect your business and ensure that you have access to any financial support you need.
You can utilize numerous strategies to manage your cash flow, including:
- Automating payments whenever possible, even if that means investing in tools that allow your customers to set up autopay and digital billing. Yes, these tools can be expensive, but likely worth the expense if they reduce the friction associated with payments. You can get money quickly by making it easier to pay.
- Accepting multiple methods of payments, which may mean accepting payments online, taking payments from any available credit card, electronic checks, or more. Depending on your industry, you may even want to invest in alternative payment methods like Venmo or CashApp.
- Consider offering discounts for paying within a set period, like a certain percentage off the bill if the client pays within seven days. Doing so may provide a financial incentive for your client to pay as fast as possible and allow you to increase your working capital and potentially reduce borrowing costs.
Conduct Bottoms-Up Budget Reviews
Consider holding monthly forecasting reviews. These reviews will allow you to determine what cash is coming in., what expenses you may need to make, and how you may need to adjust your payments and expenditures. These reviews will allow you to identify and delay lower-priority projects. Regular reviews also enable you to eliminate unnecessary vendor contracts by better connecting your expenditures to key business objectives.
Negotiate Payment Terms With Vendors
Regular budget reviews allow you to identify opportunities to negotiate better payment terms more favorable to your finances. Professional advisors can enable you to determine what financing terms to seek. Furthermore, timing matters deeply, and professionals can help you find the right time to begin negotiations.
Follow the “Cash Flow Trifecta”
The “Cash Flow Trifecta” consists of:
- Streamlining receivables
- Negotiating better payment terms with vendors
- Eliminating underperforming assets and their related expenses
Working on just one item may be helpful. That being said, you need to attack all three components of the trifecta to enact a comprehensive solution. Coming at your cash flow problems from all sides may require you to engage outside knowledge and experience to help you find the connections between these items and where the opportunities exist to make appropriate corrections. Professional advisors can help you find areas for improvement.
Work With Experienced and Educated Advisors
As a dedicated business owner, you’re no stranger to the many roles you must juggle, from product and service management to staff leadership and financial acumen. In the ever-evolving business landscape, it’s simply impossible to master every facet.
To effectively manage your working capital, you need a team of financial professionals who can offer tailored insights for informed financial decisions. More importantly, you require a bank with expertise that fits your specific needs. Generic advice won’t suffice; you need advice customized to your business requirements and working capital situation.
To find the right advice, connect with bankers or financial planners experienced in commercial banking. They should have a deep understanding of services like commercial lending, deposits, treasury management, and more.
Final Thoughts
Optimizing your working capital and improving working capital efficiency can ensure your business has the resources to expand and succeed. By developing a working capital strategy and having access to financial expertise, you can ensure you have the resources to succeed.
