Tips for Managing Your Working Capital

If your small business is facing frequent cash flow problems or you always seem to be getting behind on paying back loans and debts to different creditors, it may be time to implements some better techniques for managing your working capital. How you manage your working capital as a small business owner directly affects your operational cash flow and eventually, your profits. If you don't have an effective system in place for managing accounts receivable, accounts payable, and inventory, you'll run into cash flow problems quarter after quarter.

Here are some essential tips for managing your working capital:

1. Avoid extending too much credit. If you are too lenient with your payment terms for invoices, you'll find it incredibly difficult to sustain a healthy cash flow in the long run. Make sure that you perform a simple business credit check before granting customers any type of credit, and tighten up your terms of payment so that invoices get paid within a reasonable amount of time.
2. Don't become dependent on a single customer for business. Don't focus all of your efforts on sustaining a relationship with just a single, or a handful, of customers. Become more reliant on frequent purchases from a large portfolio of customers instead. This will help you grow your business quickly and can also prevent many cash flow and credit problems.
3. Pay suppliers on time, every time. If you don't have positive relationships with your suppliers, they may end up halting delivery of inventory and essential supplies you need to keep business operations running smoothly. Make paying your suppliers a priority by adopting some sound accounts payable practices and keeping track of your invoices.
4. Take inventory regularly. Having too much inventory or finding yourself in a situation with an inventory shortage can affect business operations and eventually hurt your profits. Make sure you're performing thorough inventory checks regularly and have a system in place to ensure inventory keeps moving.
5. Take advantage of quantity discounts. If you purchase certain items in bulk or make large purchases from a single supplier on a regular basis, inquire about quantity discounts and negotiate terms so that you can get a discount for making payment early. Depending on the nature of your business, these types of discounts can help to offset some operational costs and help you better manage working capital.

Adopting some sound business practices and learning how to manage your accounts receivable, accounts payable, and inventory can have an impact on your business's cash flow situation. Use the tips above to better manage your working capital and improve overall business operations.

Sources:

Investopedia -- Working Capital Works

The Institute for Working Futures -- Managing Working Capital

U.S. Small Business Administration -- Working Capital