Thursday, 26th January 2023 | Accounting,Management
What Is Working Capital and Why It’s Important In Your Business
Working capital is a term used for the resources your company has to meet short-term financial needs like paying employees or purchasing inventory. As a small- or medium-sized business, it’s crucial that you not only have working capital, but that you also know how much working capital you have available. Read on for more about managing and growing your company’s working capital–and why you should.
What Is Working Capital?
When your company needs products or services in the short-term, you use working capital to pay for it. Unlike cash flow, which refers to money going in and out of the company, working capital is a snapshot of a company’s financial health. You can figure out what your company’s working capital is by looking at the value of your company’s assets minus your liabilities. This is the amount of money you have on hand to meet immediate expenses–in other words, your working capital.
Why is it important?
It’s obvious that a company should have the working capital it needs to pay its employees and purchase inventory, but your available working capital is also a good measure of your company’s overall financial picture. If you have access to sufficient or even plentiful working capital, you can rest assured that you have the resources to manage your upcoming expenses. If your working capital is low, you can run into problems.
Additionally, working capital is essential in helping businesses maintain and grow their operations in the future. With enough working capital, a business can cover its expenses even if there are outstanding payments from customers. In the best-case scenarios, businesses can use extra working capital to reinvest in their operations by buying additional inventory, launching marketing and promotions, and hiring additional staff.
Every business should strive to have ample working capital, but this can be a challenge, particularly in times of economic downturn.
4 Tips To Improve Your Working Capital
1.Get a Cash Flow Forecast
It’s easier to get where you want to be if you have a clear picture of where you are. A cash flow forecast is a financial projection that shows how much money your company can expect to receive and when. Make sure you look at revenue, expenses, and net cash. With this information, you can make better, informed decisions about spending.
2.Automate Business Processes
Your working capital relies on receiving payment, so it makes good business sense to streamline the invoicing process. Using an automatic invoicing system, particularly one that’s tied to the delivery of your product or service, will free up time and, importantly, ensure your invoicing isn’t delayed due to busy employees or time constraints. The ability to track your invoices can make your working capital more predictable, which will allow you to make educated decisions about spending.
3.Incentivize Receivables
If you run a small- or medium-sized business, you’ve experienced late payment, or even worse, no payment at all. Following up with outstanding invoices is time-consuming and frustrating, so it’s smart to bake in incentives for customers, suppliers, and vendors who meet their obligations. Incentives could be monetary or symbolic in nature. The idea is to encourage good business practices while fostering positive relationships.
4.Improve Inventory Management & Avoid Stockpiling
Inventory management is the process of matching your company’s inventory to expected sales. The trick is to make sure you have enough–but not too much. Stockpiling inventory is expensive, and money tied up in overstock can’t be spent on more immediate needs. Consider investing in a digital solution.
Access to sufficient working capital is a great indicator that your business is healthy, and a healthy business is one that’s positioned to grow and take on new opportunities.
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