Managing working capital is a commonly overlooked task for the entrepreneur-to-be. However, once the business is underway it becomes apparent that it is a necessary task.
The goal is obvious: satisfy all debt with enough remaining capital to keep the business going while turning a profit. Luckily, there are multiple aspects of your business that, when focused on, can enhance and ease the task of managing working capital.
1. Stay Stocked but Streamline
This is a common pitfall for the type-A personality entrepreneur, that of overdoing it in stock. It’s true, not having the necessary inventory in place could cost you a sale, but excessive inventory could be costing you too.
There is no need for working capital to be tied up in an exorbitant amount of stock. Considerate planning will afford entrepreneurs to stock what they need without holding additional working capital hostage on a stagnant shelf.
The means of notation (computer, hand-written) does not matter, just focus on finding an inventory system that works for you and commit to sticking with it.
2. Plan for Lows
Industry trends and seasonal changes can affect the rate at which your business turns a profit. As an entrepreneur, your best bet is to forecast sales.
You can effectively plan and predict by checking up on your competitors, paying attention to industry shifts and setting modest goals. With some proactive planning, your business’s cash flow can withstand the lows by compensating in areas like inventory and labour.
3. Pay On Time and Not a Second Sooner
For some, it makes sense to pay suppliers as soon as their business receives an invoice. However, that cash could better serve your business in other areas (like investments and interest). Schedule out paying your creditors back so that payments are always received on time, but at a consistent rate that you can plan for and manage.
On the flip side, there are creditors out there who offer discounts for early payments. Inquire if such perks exist and see if by paying sooner, you can save your business some much-needed working capital. Also, if you are a loyal customer to certain creditors, see if you can establish a routine pay date at a time during each month that works the best with the flow of your business.
4. Borrow With Care
Financial lenders can offer short-term funding that can alleviate the working capital needs of a business. Entrepreneurs who are looking to make improvements (such as expansion, more inventory or new equipment) might consider a merchant cash advance so not to disturb their company’s cash flow.
Like any business decision, entrepreneurs should make the decision to borrow with care. In exchange for quick funding and minimal requirements, historically the rates are higher than others.
Question: What other measures can entrepreneurs take to better manage their business’s cash flow?