Working capital refers to the cash on hand that you use to run the daily financial obligations of your business and keep it afloat. Whether you’re running a startup or a world-class company, your working capital will affect the long-term financial status of your business. It ensures you have enough cash flow to cater to the short-term expenses that may impact your business operations.
Working capital dictates whether or not you can procure materials, pay wages and salaries, and meet all production demands. You’d want to increase your working capital to run a successful business. In case you’re wondering how to boost your operating money, here are a few tips:
- Find New Sources Of Finance
One way to increase your working capital is by finding new sources of finance. Find various ways to improve your financing capabilities to keep the business running. You can finance your business in many ways, including with personal investments and short- or long-term loans.
Consider requesting business loans from banks or other lending institutions to help you finance your business. Where long-term loans aren’t an option, consider getting an Australian Business Number loan from credit unions, online lenders, or banks. However, you must first understand how ABN loans work before getting one. Also, do research on trusted creditors with reasonable interest rates.
You can also lease or sell your property that the business doesn’t use for extra finance. It also reduces expenses for maintaining these assets. However, wait to sell any property you may need soon. Instead, lease them for a few months before you can start using them.
- Reduce Your Expenses
The value of any business is determined by the amount of profit the company can generate. Business demands and expenses like wages and salaries, repairs, and production demands are enormous and can significantly impact your earnings.
Examine your budget and break it down, eliminating any unnecessary expenses. You need as much working capital to run a successful business. Analyze your cash flow and compare it to your bills to see if there are expenses you can eliminate or reduce. However, consider the needs and demands of all shareholders (employees, investors, vendors, and customers) before making any changes.
- Manage Your Inventory
Another way to boost your working capital is by managing your inventory correctly. Inventory includes all assets used in production, semi-finished, and finished goods. They determine your business’s viability and operating efficiency and are the first thing investors and lenders will look at before investing in your company.
Excessive inventories result in waste and unnecessary expenses, whereas small lists may result in insufficient product availability. It’s, therefore, crucial to use an inventory management system that balances your stock levels and avoids overstocking and understocking.
- Don’t Finance Fixed Assets With Working Capital
All businesses, whether startups or large companies, have fixed assets. These are equipment, buildings, vehicles, and land for long-term growth. You can sell a fixed asset to increase your working capital, but it’s never a good idea to use this capital to purchase a fixed asset because they’re pretty expensive. Instead, you can use long-term loans or leases to finance such projects.
- Avoid Debt Trap
As much as you want to increase your business value through assets and increased productivity, you must be careful not to get into a debt trap. It’s a situation where the amount of money you owe could be more manageable.
It shows that you spend more than you earn, and your business may not spring back from this predicament. You can, however, avoid debt traps by prioritizing your demands, managing inventory, and reducing your expenses, which in turn helps boost your working capital.
- Track Your Business Performance
Tracking how your business performs will help you identify the areas that generate enough cash flow for your business and those that need improvement. You’ll be able to tell whether your business operations align with your long-term objectives. You’ll also know where there’s unnecessary spending, and when you have assets, you can sell or lease them to generate more capital.
- Make Use Of Tax Incentives
Another way to increase your working capital is to make the most of the tax incentives your business qualifies for. Various states offer businesses incentives when they conduct business within these regions. The typical tax incentive you may get includes the following:
Tax holiday (granted to new companies)
Financing incentives, such as reduced withholding taxes on dividends
Reduced tax rates for special zones
All these tax incentives will help reduce your tax obligations, increasing your working capital.
- Automate Your Financing Process
Handling your business financing requires hiring an extra workforce specializing in this area. Experts will help you manage and keep a watchful eye on your finances, which is suitable for your working capital. However, you’ll have to hire and train new employees if they quit, which can result in inefficiencies and errors. The best way to avoid such complications is to automate your accounts. This way, you’ll make and receive payments on time.
- Reduce Operating Cycle
The business operating cycle begins after you invest in a particular project and ends when you receive payment or interest. Reducing the time between the beginning and the end of your business’s operating cycle is essential.
Short cycles mean increased cash flow, generating more working capital for your business. One way to reduce the cycle is by requesting a downpayment, sending out invoices on time, and collecting payments immediately after making a sale.
- Examine Customer Credit
It’s crucial to examine the creditworthiness of your clients before extending credit to a new or existing customer. It’ll help you avoid falling into bad debt because you’ll be able to tell whether or not the client will make the necessary payments on time, and you’d want to ensure they can afford the services rendered. You can also start by issuing a lower credit limit for new clients and increase it later when they prove they’re punctual with their payments.
Working capital plays a crucial role in the growth of your business, and it’d be best if you focused on improving it. You can start by getting rid of unnecessary expenses and managing your inventory. Boosting your working capital will generate more cash flow for your business, raise profitability, and increase efficiency and growth potential.