Ravi Chandran
You can increase working capital by taking out a long-term loan which can pay for itself by helping you secure early payment discounts
To increase working capital should be the goal of every business. Working capital is the backbone of any business, so learning how to maintain or generate more cash in your company is vital to success.
Working capital basically the cash you need to operate, or your current assets minus your current liabilities. Without enough working capital, you could lose your flexibility and credibility with financial institutions, suppliers and customers. Depleting your working capital can also diminish your capacity to exploit new business opportunities. For example, if your competition suddenly closes up shop and you need more inventory to service their customers, you would need working capital to buy that additional inventory. Without it, you’re unable to react quickly.
Keeping sufficient working capital on hand can be a major challenge for cash-strapped entrepreneurs, so remember the basics. Making sure your business gets paid for the goods and services it provides is still the most elementary way to increase working capital.
To increase working capital, you want to ensure that your customers have a good credit history and that they will respect your payment terms. Otherwise you may find yourself without cash when you need it.
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it is important that entrepreneurs clearly communicate their credit policy up front. Your clients need to know the maximum amount of credit you will grant them, payment terms—30, 45, 60 or 90 days—and deposit requirements. Ask yourself: “How much can I afford to lend my customers without draining my working capital?”
1. Don’t wait until the end of the month
Collecting payments from customers faster is an obvious route to keeping more working capital in your company. Still, it’s important not to put your rapport with clients in jeopardy. You need to keep your clients happy and attract sales, but at the same time, ensure that you’re not footing the client bill too long..
To help protect yourself from late payments, you should be billing as early as possible. You don’t have to wait until the end of the month. That’s a common fallacy. You need to generate an invoice as soon as the goods or services are delivered.
2. Don’t finance fixed assets with working capital
Entrepreneurs should not deplete their working capital to finance fixed assets such as equipment.
A lot of small businesses tend to use cash to pay their debts. It’s an old mentality. In the end, you would be better off using long-term loans to pay for fixed assets. When business owners use up all of their cash, they also look more risky to financial institutions. You may lose their confidence that you’re running a healthy company.
As an alternative, a long-term loan allows entrepreneurs to increase working capital and breathe easily knowing you can pay for assets at a set pace.
You can easily recuperate the costs of interest on a long-term loan. For example, if you keep a good cash flow and are able to pay your suppliers quickly, you’re more likely to be able to secure discounts. In turn, these discounts can partially pay the interest on your loan. Eventually, you’ll get the cost of the loan back.
3. Borrow to increase your working capital
Taking on long-term debt for working capital also pays off. You can’t grow your business and increase your profits if you’re not investing in your company. For instance, if you have a list of clients, you can only change them into real accounts receivables if you can afford the inventory to sell to them – It’s basic business know-how.
4. Refinance your fixed assets
Entrepreneurs can also consider refinancing fixed assets such as equipment in order to generate and increase working capital. Basically, you’re leveraging your assets and turning them into the cash that you need. Business owners can benefit from the extra working capital to improve their plant layout, pursue new export markets or align their human resource strategies.
5. Make a personal investment
Another option for business owners is to make personal investments to increase working capital. You’ll first need to do a cost/benefit analysis to see what return you will get on your investment. This is a viable strategy if you see that the payoff in your business outweighs personal losses.
6. Get external advice
It’s not always easy for entrepreneurs to see how they can improve their cash flow, so business owners should seek outside help. A consultant will typically help entrepreneurs do a thorough assessment and look at key areas such as their sales cycle, inventory turnover and credit terms for suppliers and customers. They can also find areas of the business where there is room to improve and find ways to generate more cash internally.
Loan consultants for example, can be your best friend when economic times are tough. But, as in any relationship, credibility and trust are key. And that requires mutual respect, honesty and staying in touch.
Contact your loan consultant often and keep them posted on what’s happening with your business, even if you’re not looking for money. Bring them into your inner circle and have them visit your operations at least once a year. Ideally, develop that relationship during good times so that you can count on them when times get tough.
Loan consultants are much more receptive to loan requests from businesses they have established relationships with. But expect more stringent due diligence and more questions from lenders when the economy isn’t doing well.
