Best Practices For Managing Your Working Capital

All your excitement about how things will boom and give you big returns can help you jumpstart your entrepreneurial journey. This motivation is something you should ride on even when days get tough and things get a bit tricky as you go through the daily grind.

One of the things that could be challenging for the startup entrepreneur is how to be liquid enough to keep the daily operations running smoothly. Managing your working capital can be a headache, especially when you have clients who go over their credit terms; when all your assets are in equipment and real estate; and when there seem to be more receivables than actual cash on hand.

It is wise to be guided by best practices as you go through your day to day operations. Making sure your cash flows are reliable is important – and can be the next thing on the list of priorities that need to be protected, right after your bottom line.

Here are some of the best practices you should take note of:

1. Reduce your operating costs as much as possible.

If there are ways you can manage to lessen your operating costs, do so as much as you can. Some things you can scrimp on:

  • Rent. Where are you renting, and what is the size of your current office space? If there is a way to reduce this expense, such as moving to a less commercial area in order to keep the big space, or picking a smaller office if most of your workforce is in the field anyway or can work from home, then so much the better. This can free up significantly more cash to work with every month.
  • Equipment. Is it necessary to buy a new vehicle, or a new machine and accrue for depreciation periodically as well? It may be better to just rent, or buy second-hand versions of heavy equipment if they don’t have to be new, or if you don’t necessarily have to own them in order to keep your business working.

2. Keep a close watch on your interest expenses and loans payables.

As much as possible, don’t take on loans. It is better to be in the habit of spending within your means, instead of taking on loans and continuing to pay interest on them just to answer for your cash flow needs. If it is absolutely necessary, look for alternative ways to loan money instead of your traditional bank loans. For example, you can get a venture capitalist or a merchant cash advance and pay them back via the sales you actually make like those from Nav.

3. Enforce stricter credit terms with your clients.

Make sure you are giving payment terms you can actually afford. Don’t give a 120-day credit line if you know you need the money much sooner than that. You can give your clients incentives for paying early or penalties for paying late. Make sure you are enforcing these strictly so they know you are serious about your contracts, and so that you get your cash in a timelier manner.

These are some of the best ways you can ensure that you have a healthy amount of working capital always available for you. Be frugal in the aspects that you can be, and be creative in sourcing your cash, so as not to be stressed with your expenses, and so you can focus more on growing your business.

Dragan Sutevski

Posted by Dragan Sutevski

Dragan Sutevski is a founder and CEO of Sutevski Consulting, creating business excellence through innovative thinking. Get more from Dragan on Twitter. Contact Dragan