Keeping the lights on and the doors open takes money. However, depending on the complexity of your company’s finances, knowing if you have the funds to cover your upcoming bills can sometimes take work.
Working capital — sometimes called “net working capital” — is a snapshot of the liquidity available to your business right now. Or, to be a little more specific, working capital reflects the funds you have left after converting all of your current assets into cash and paying off any existing liabilities.
If you’ve noticed recently that you are regularly short on funds and have concluded that you need to increase your business’s working capital, this guide can help.
Working capital formula
Before we dive into how to increase working capital for your business, it’s vital to ensure that you’re calculating your working capital correctly. You can do so with the following formula:
Working Capital = Current (Short-Term) Assets – Current (Short-Term) Liabilities
Short Term, referred to above, speaks to assets or liabilities resolved in the next 12 months. Current assets include your accounts receivable (A/R), inventory that can be quickly sold over the next year, or cash and cash equivalents. Meanwhile, current liabilities would cover your accounts payable (A/P), payroll, utilities, or taxes.
What causes working capital to increase or decrease?
The more working capital your business has, the more options you have to grow your operations. You can cash in some reserve to make facility improvements or research new offerings. Or you can float bigger orders that tie up larger pools of capital.
But what if your available pool of funds isn’t that large? How can your business grow its working capital?
As you might suspect, changes in your working capital are tied directly to changes in your revenue and expenses. If you increase your sales volumes or receive interest or dividend payments from your investments, your bank account and working capital will grow.
Similarly, if you cut back your expenses — perhaps by switching to a new supplier that offers lower prices for the raw materials used in your day-to-day activities — such a move will also positively impact your working capital.
Further, the inverse is true. If your sales begin to stymie or material costs spike, you’ll see a corresponding decrease in working capital. Your business could be in trouble if that level dips into the negatives, meaning you don’t have sufficient funds to cover your current bills.
How to improve working capital: 9 strategies that work
1. Boost sales revenue
The most obvious strategy to increase your working capital is to sell more. This is always easier said than done, but it’s certainly possible. Consider hiring new sales staff or exploring new marketing channels. You might also improve the incentive structure for your sales force, which often can encourage increased performance.
Another strategy that runs the risk of annoying your customer base is raising your prices. If you’re undercharging for your goods or services, setting appropriate, competitive prices can positively affect your cash flow.
But be reasonable: If you begin charging too much, your sales may plummet.
2. Cut out waste
You’re artificially limiting your available capital if you’re not spending your money efficiently. Regularly evaluate your business operations and outstanding liabilities to identify unnecessary spending or overspending. With each cost, ask yourself, “Is this truly necessary to keep my day-to-day operations running and keep my employees happy?”
At the same time, consider limiting who can authorize spending to a select few employees. When key decision-makers are responsible for signing off — and justifying — each expense, fewer nonessential charges will slip between the cracks.
3. Embrace automation
Shortening your operating cycle — the efforts necessary to convert production assets into cash — is one of the most efficient strategies for boosting your working capital. Automation is not only an invaluable tool in accelerating these processes, but it can also free up your accounting employees for more important tasks.
For instance, automated workflows and verification steps within your A/R can help improve the accuracy and timeliness of your outgoing invoices.
Most accounts receivable automation software comes with analytics capabilities that help you stay accurate in your reports and statements. More accurate statements mean that your customers will be less likely to delay payments while they clarify any outstanding questions or challenges to their current bill.
At the same time, by deploying a payment portal (like Invoiced’s ERP connect) that directly integrates with your customers’ enterprise resource planning (ERP) platforms, you can make it much easier and simpler for purchasers to send you their money.
4. Employ real-time tracking and forecasting
Knowledge is power. And ignorance can be a significant liability. If you want to control your cash flow efficiently and overall working capital, you need clear insight into your current accounts and any emerging trends.
As such, you should report on and evaluate your working capital daily. And this analysis should also drill down into individual operations. How long does it take to send out an invoice? How long do individual buyers take to pay their bills? What do current sales look like?
By proactively monitoring your financial data, you’ll be more likely to identify process bottlenecks or other issues before they impact your cash flow.
5. Leverage fixed assets
Selling your fixed assets — hard goods such as equipment, buildings, vehicles, or land — can substantially increase your working capital. However, these items are referred to as “fixed” assets because they often take more time and effort to convert into cash. So, while it may not lead to a fast boost to your capital, offloading any surplus office space or equipment usually makes sense. Alternatively, you can try leasing these excess resources to outside parties for an additional revenue stream.
Ideally, your fixed assets will empower you to generate long-term growth, so you should finance these acquisitions with long-term loans rather than through your working capital. Or you might consider outsourcing specific processes or securing a lease for needed equipment — mainly if the technology is regularly updated.
6. Manage your inventory
Every dollar you have invested in your existing inventory is a dollar that you can’t use anywhere else in your business. So, rather than tying up available capital in products that need to sell, consider shifting to a just-in-time logistics strategy. By better matching your actual output with customer demand, you can cut warehousing costs and streamline the purchase of raw materials.
Of course, to be successful, you’ll need accurate sales forecasts and projections to adjust manufacturing levels properly — which means you should invest in analytics software before upgrading to a more comprehensive inventory management platform.
7. Negotiate early, negotiate often
You might get the best deal from your suppliers, vendors, and customers. Or you might not. Rather than hoping, you should regularly and proactively renegotiate the financial terms surrounding your operations.
Can you get a better price for raw materials by buying in bulk or switching to a competitor? Are you being overly generous in the credit terms you offer to customers? Could you place your vehicle fleet at a better price point? With a little effort and persistence, you can strengthen your working capital without major disruptions.
8. Reduce bad debt
Not getting paid for your goods or services will negatively impact your working capital and overall business. But smart, efficient accounts receivable operations can help draw in those outstanding bad debts. For instance, you may offer early-payment discounts to encourage more buyers to pay their bills immediately.
As discussed, a payment portal can also help eliminate unnecessary wait times. You might examine A/R platforms that provide automated chasing. Rather than relying on the memory and consistency of your human staff to send out reminder notes, you can schedule these touches in advance.
It would also help to pay closer attention to whom you’re extending credit. For new customers, perform a credit check or review their recent credit reports before offering any terms. Similarly, keep an eye on your existing customer pool. Are there any buyers that have started taking longer to settle accounts? This could indicate that they are experiencing their own working capital challenges and might be unable to pay in the near future.
9. Time your accounts payable
Controlling when you pay your bills can incredibly impact your cash flow and working capital. Do you need to strengthen your cash standing quickly? By postponing the payment of your bills until the last moment, you can hold onto that capital for a longer period. Conversely, if your suppliers offer substantive early-payment discounts, you should cut those checks immediately and reduce your overall expenses. Accounts payable management strategies can be very important to improving your working capital.
Increase working capital with Invoiced
The 9 practices and adjustments we’ve outlined will give you the best chance at bolstering your working capital quickly. Of course, if you don’t have the resources or availability to tackle all 9 strategies at once — and honestly, who does? — we recommend prioritizing automation. We’re so confident that this approach will drive you toward financial success and stability that we built our entire business around it.
With our Accounts Receivable Automation software in place, you’ll have greater visibility into your invoicing and collection efforts and the flexibility to share that data throughout your entire enterprise. Similarly, automated workflows and verification checks will help you drive down billing mistakes and better detect fraud — measures that will positively impact your bottom line. Finally, our Smart Chasing technology will deliver multi-channel reminders that promote prompt payment and remove the busywork from your A/R.
To explore how automation can impact your business’s working capital, schedule a demo with Invoiced today.