Working capital is crucial for maintaining operations and business growth. It enables companies to manage short-term obligations and “keep the lights on” while keeping an eye on the long term. Maximizing working capital creates a domino effect of benefits that directly impacts the bottom line.
Automating accounts receivable processes can significantly affect this. From simplifying billing to processing payments quicker, a quality payment automation platform can be the key in ensuring all short-term obligations are handled.
What Is Working Capital?
Working capital is money used to cover short-term expenses, typically defined as 12 months. This usually includes inventory, short-term debts, payroll, and other day-to-day expenses. It may also be referred to as operating expenses and ensures that a company runs smoothly.
How To Calculate Working Capital
As a formula, working capital is simple to calculate:
Current Assets - Current Liabilities = Working Capital
Current assets are anything owned that can be converted into cash within 12 months. This may include investments, accounts receivable, or cash on hand.
Current liabilities are any unpaid bills and may include payroll, vendor payments, or rent.
Operating Capital vs. Working Capital
While operating capital and working capital may seem to be interchangeable, there is a distinct difference. Operating capital measures the liquidity of a business and applies more to a long-term view. It takes into account the value of all long-term assets versus all long-term liabilities and extends the view beyond the 12 months work capital looks at.
Accounts Receivable Automation Can Help Increase Working Capital
Automating A/R is a relatively simple and straightforward way to ensure that working capital is and remains healthy. It improves customer experience and employee productivity and doesn’t require a massive shift in operations.
So, why is A/R automation a good choice for increasing working capital?
Simplifies the Billing and Collections Process
The most direct thing you can do is to get bills sent on time. This simple step gets the payment process started and doing so quickly means more money in your accounts. The basic step of getting bills sent in a timely manner fundamentally speeds up the process.
The same can be said of receiving payments. Making it easy for customers to pay you means fewer delayed payments. An A/R solution that sends reminders when necessary and makes the chasing and dunning process easy helps get payments in on time. A/R automation removes internal and external factors which keep money you’re owed out of your accounts.
Creates a Fluid Payment Experience
A/R automation must make it easy for customers to pay you. Including a self-service portal is essential for this and allows customers to make payments when they want and how they want. Adding flexible payment options, like partial payments, is an added benefit, and helps accounts get settled quicker.
Real-Time Tracking and Forecasting
Managing working capital requires clear visibility into current status and trendlines. A/R automation includes business intelligence and data that enables management to make informed decisions.
Working capital needs to be evaluated on an almost daily basis. A/R automation platforms provide the information to do just that.
Increasing Working Capital to Fuel Business Growth
Working capital both protects and propels businesses. For the immediate, it ensures that companies avoid financial strife and are able to meet short-term needs. Then, by meeting these needs, long-term plans can be executed to grow business for decades to come.
A/R automation makes it easier to increase working capital by reducing the time it takes for customers to close out accounts. It’s a simple and effective approach that benefits your customers and your business.
