Why is positive working capital important? Positive working capital indicates that a company has enough assets to meet its short-term obligations, while negative working capital suggests that a company will likely struggle to pay its bills in the near future. Generally, a high level of working capital is a sign of financial stability, as it shows that a company has the resources to fund its day-to-day operations.
How does a business owner improve working capital? Here are 20 proven strategies.
- Improve Accounts Receivable Management: Post payments to customer accounts on a regular and consistent basis and implement efficient processes to collect payments from customers.
- Manage Inventory Levels: Reduce excess inventory levels to free up cash.
- Negotiate Better Payment Terms with Suppliers: Negotiate longer payment terms with suppliers.
- Offer Early Payment Discounts: Offer early payment discounts to customers to encourage them to pay sooner.
- Increase Sales: Increase sales to improve cash flow and working capital.
- Improve Operating Efficiency: Streamline operating processes, reduce waste, and reduce overhead costs to improve profitability
- Reduce Overhead Costs: Reduce overhead costs such as rent, utilities, and insurance.
- Implement Cost-Cutting Measures: Identify and implement cost-cutting measures to help improve working capital.
- Use Factoring and Invoice Discounting: Factoring and invoice discounting can provide a business with cash by selling its accounts receivable at a discount.
- Obtain a Line of Credit: Obtain a line of credit to provide access to additional cash when it’s needed.
- Utilize Technology: Implement technology/software solutions to help improve operational efficiency and reduce costs.
- Evaluate the Performance of Current Investments: Evaluate the performance of current investments and sell underperforming investments to help improve working capital.
- Improve Accounts Payable Management: Implement efficient processes to manage payments to suppliers to help improve working capital by extending payment terms.
- Implement 13-Week Cash Flow Forecasting: Implement cash flow forecasting to understand and improve working capital.
- Refinance Debt: Refinance debt to help improve working capital by reducing monthly debt service payments.
- Sell Non-Core Assets: Sell non-core assets to provide a business with a one-time infusion of cash to improve working capital.
- Increase Prices: Increase prices to improve working capital by increasing revenue.
- Focus on Profit-Generating Activities: Focus on activities that generate profits.
- Negotiate with Creditors: Negotiate with creditors to reduce interest rates, extend payment terms, or reduce the balances owed.
- Obtain Government Grants or Loans: Obtain government grants or loans to provide additional funding to improve working capital.
It’s important to highlight that each business is unique and the specific strategies to improve working capital will vary. A qualified Fractional CFO or full-time CFO should have the tools and skillset required to calculate and forecast a company’s working capital requirements.
About the Author
Barry Kehl is a Fractional CFO and a Partner of SignalCFO. SignalCFO was founded in 2016 and is a leading Fractional CFO firm located in Indianapolis, Indiana. They work with companies across the United States with expertise in SaaS (software as a service), manufacturing, professional services, insurance, data science and food service.