7 Techniques to Increase Working Capital
As most business owners know, managing cash flow is essential to the survival of a business and needs to be carefully controlled. Cash flow indicates the well-being of a company and helps to determine a company’s ability to pay its bills such as payroll, rent, and vendors. Unfortunately, lack of working capital is one of the leading reasons businesses struggle and why some eventually close their doors. This blog article offers seven ways to ensure your cash position is functioning positively.
1. Negotiate better payment terms
Try to negotiate with your suppliers for longer payment terms or even in installments, especially for larger purchases. Your strategy should be to pay your suppliers later and collect from customers sooner. If you are successful, you will reduce the need to use personal funds or to seek financing. Besides, if you are a first-rate customer, suppliers should be more than happy to oblige you.
Related: How to Manage Creditors During a Cash Flow Shortage
2. Use inventory efficiently
Far too many businesses carry higher than needed inventory levels for fear of running out of product for their customers. In some circumstances, these companies become an extension of their supplier’s warehouse. Ideally, strive to carry minimal required inventory levels and only replenish what’s necessary. As a result, it will prevent a needless drain on cash.
Related: How to Cut Business Costs
3. Grow your customer base
Not surprisingly, many small businesses rely on just a few customers to generate the majority of their sales. Having only a few key customers increases the risk of not having a positive cash flow if one of these customers experiences any unfortunate business difficulties.
4. Efficiently administer accounts receivable
Unpaid customer invoices can halt business in its tracks. Don’t wait to send out invoices at the end of a monthly cycle, but instead send them out whenever a project or sale gets completed. Likewise, for any overdue accounts, be sure that you are sending out timely statements and friendly, follow-up reminders to get the attention of the customer.
Many growing companies find themselves facing a cash flow gap and turn to invoice factoring, or accounts receivable financing, for immediate access to working capital. When you sell your invoices to a factoring company, they now collect payment from your customers alleviating one more administrative task.
Related: Selling Accounts Receivables to Finance Your Business
5. Avoid offering discounts
Even though providing a discount for early payments is an effective way to generate cash sooner, it also can be an expensive proposition. However, a short-term use of the program could help offset any temporary softness in business activity. Be mindful not to make it a standard operating procedure as it could erode profit margins.
6. Apply stricter credit terms
Typically, many small business owners have laid-back payment terms and may allow customers to extend their credit beyond a reasonable amount of time. While it may please the customer, it can negatively impact your ability to meet the financial obligations of the business. As a small business, you want to make sure that you have favorable payment terms, including working capital for larger jobs and purchases.
7. Establish a contingency fund
A primary reason that a growing business fails is the lack of adequate cash reserves. If your business is profitable, you should have more cash available to put to work in an interest-bearing account. Not only will that action create additional capital, but it can also be used to offset any financial setbacks due to a slowdown in the business.
The Bottom Line
When faced with a cash flow issue, business owners have a variety of options to improve their working capital. Implementing the techniques outlined in this blog article will improve your cash flow as well as better position your business for financial stability in the long-term.
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Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.
About Universal Funding
Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.
