By Yhordan Serpentini | January 21, 2023
Working capital is a key component for the success of your business and finding cost-effective ways to build it can be a challenge. In today’s blog, we’ll be discussing several cost-effective ways for you to boost your current working capital, covering everything from cutting costs to utilizing technology to help you grow your business.
1. Analyze Your Current Working Capital
Analyze your current working capital before developing a plan to boost it, including taking a closer look at your accounts receivable, accounts payable, and cash position—this will help you understand your current financial position. Look at your average daily balance and consider any upcoming payments or large purchases, as well, as you’ll get a better idea of how much cash you have available to boost your working capital.
Furthermore, you will also need to analyze your accounts receivables. This means you’ll need to review and calculate your average day’s sales outstanding (DSO) to determine how quickly customers are paying, and how much profit you are receiving. Why is this important? Well, to put it simply, doing this will identify which customers are the most valuable and which ones may be slower to pay—knowing the target consumers that have their retention hooked onto you is a great strategy for future marketing.
You should also consider analyzing your accounts payable, including when and how you pay your suppliers and creditors to maximize your cash flow. Consider if you can negotiate better terms or if there are any opportunities to pay later; and don’t forget about technology! Utilize software solutions for your accounts receivable and payable processes to streamline your workflow. This can help you reduce costs and quickly identify any cash flow issues.
2. Improve Your Cash Flow Management
One of the most effective ways to improve your working capital is to take a closer look at your cash flow management. This means regularly reviewing your cash flow statements and tracking your accounts receivable and accounts payable. When managing account receivables, consider offering incentives for early payments and also be sure to follow up on unpaid invoices as soon as possible. Likewise, when managing account payables, review your inventory management and reduce excess stock, take advantage of early payment discounts, and negotiate better terms with suppliers.
3. Leverage Invoice Financing To Access Capital Quickly
Another cost-effective way to boost your working capital is to leverage invoice financing. This type of financing allows businesses to access capital quickly by selling their unpaid invoices to a third-party lender. The lender then pays the business a percentage of the invoice amount upfront and the remaining balance when the customer pays. This type of financing can provide businesses with quick access to capital, which is especially helpful when dealing with tight cash flow.
4. Refinance Your Loans
Refinancing your loans can be essential for boosting capital as it brings with it a variety of potential benefits like lower interest rates—which can free up cash flow—, access to larger capital amounts, and reduced monthly payments. Refinancing can also provide access to larger capital amounts when needed, and reduced monthly payments are always something to be welcomed in anyone’s income, business or not, as it will provide additional working capital. When considering refinancing your loans, make sure to compare the total cost of refinancing to the savings you’ll receive. This will ensure that the move is cost-effective and will help you maximize your working capital in the process.
5. Reduce Overhead Costs
One of the most effective and cost-efficient ways to improve your working capital is to reduce your overhead costs. This can be done in a variety of ways, such as cutting back on non-essential expenses, negotiating better rates with suppliers, exploring alternative financing options, and outsourcing when possible. Reducing your overhead costs will free up more capital to invest in other areas of your business, rather than being wasted on unnecessary or less important fields. For example, you could use the extra money to purchase new equipment or hire additional staff.
Another great way to reduce overhead expenses is to negotiate better rates with suppliers. This can be done by getting quotes from different suppliers and then comparing the prices. You may even find that a different supplier can offer you a better rate than your current one. You may also want to explore alternative financing options. For example, you could look into government grants or loans, or other types of financing. These can provide you with the capital you need without having to take out a loan or use up all your working capital.
6. Look For Alternative Funding Sources
There are a number of low-cost financing options available to small businesses that can be used as alternative funding sources. The Small Business Administration (SBA) offers a variety of loans and lines of credit that are designed to help businesses meet their working capital needs. These options are often more affordable than traditional bank loans, so it’s worth exploring what the SBA has to offer. In addition to SBA loans, many businesses can benefit from early payment discounts from vendors or suppliers. By taking advantage of these discounts, businesses can free up cash to invest in their working capital.
Asset-based financing can also be a great way to increase working capital, as this type of financing allows businesses to use their assets such as inventory, accounts receivable, and equipment as collateral for a loan. Factoring is one of the most popular forms of asset-based financing and can be a great way to access the capital you need. Businesses should consider looking into crowdfunding or peer-to-peer lending as potential sources of working capital. Crowdfunding can be a great way to raise capital from a variety of sources, while peer-to-peer lending platforms can offer businesses access to affordable loans with flexible repayment terms.
7. Take Advantage of Tax Credits
Tax credits are a great way to boost your working capital and reduce your overall tax burden. Many businesses can qualify for a range of different credits, such as those related to research and development, renewable energy, hiring veterans, and others. Knowing which credits are available and how to maximize them can be a great first step in increasing your working capital. When researching and evaluating the different tax credits that may be applicable to your business, be sure to take into account any requirements related to filing, documentation, or other requirements.
Depending on the type of credit, you may need to provide additional information or documentation to receive the full benefit. Additionally, you should review your filing history to see if there are any missed opportunities for tax credits. Though it should be noted that tax credits are only available for businesses that meet certain criteria and follow the rules, and if your business fails to adhere to these requirements, it may be subject to penalties or other repercussions. So, make sure you do your due diligence and understand the requirements of any credits you are applying for.
Disclaimer: This blog is not intended for financial advice
Sources:
- How to increase working capital: Allianz Trade in USA. Corporate. (2022). Retrieved January 21, 2023, from https://www.allianz-trade.com/en_US/insights/increase-working-capital.html
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