On Maintaining A Positive Working Capital
All business owners would know that one of the biggest challenges when doing business is maintaining healthy working capital. Throughout the duration when you run your business, there are bound to be instances when you will struggle with your cash flow. One possible reason for this would be due to insufficient funds at the onset of the business. As new businesses usually get their stock on credit basis from suppliers, the cash flow will definitely take a hit once you have paid off the suppliers as sales will not be a lot yet. Another possible reason for struggling cash flow would be if you have invested in company assets, such as renovations or a new system for your business. Add in operational expenses and you will definitely have an unhealthy cash position.
Although problems with cash flow is a normal part of operations, it is important to find a way to turn the tide around to make sure that positive working capital will be reached in order to cover all your day to day expenses. Working capital basically refers to the liquidity of the company and its overall financial health. The company’s propensity to pay all their obligations well is an indication of good financial health. The same thing applies to the company being able to procure stocks or inventory. Should cash flow be good, then purchasing should not be an issue. In a nutshell, positive working capital means that the company’s assets should be higher than the company’s liabilities. In fact the assets should be at twice the size of your liabilities. That way all your payables can be paid on time. For business owners, here are some ways on how you can maintain a positive working capital:
Inject additional capital
If you really have minimal funds but your business is slowly growing, it might be time to look at injecting more funds. Then from there you are set aside money to take care of all your operational expenses, such as utilities (electricity bills and water bills), salaries and supplies. Set aside these basics for the next three months, should you not have any business during this period.
Manage your inventory
Your inventory can be considered your biggest working capital item. Because inventory is convertible into cash, they have to be managed properly. You need to do proper forecasting as to how much you need to dispose of your inventory to make a certain amount of sales that will keep your business afloat. Always keep in mind that the faster you sell your inventory, the quicker you will have cash on hand. By allowing your inventory to just sit and collect dust, you are just incurring a big opportunity loss.
Talk to your suppliers
If you are getting your inventory on credit from your supplier, talk to your supplier about your terms. If the initial agreement stipulated that you will pay after having the inventory for six months, then try to stretch it. Discuss your predicament with your supplier and request them to stretch your terms as long as possible in order for you to fully maximize your cash flow. Most suppliers will be lenient and understanding, especially for startup businesses and those who are suffering losses. The problem with the cash flow often starts when the turn around time for selling the inventory takes a longer amount of time as compared to your credit term. Chances are all the reserves in the bank will be used to pay the supplier.
Be particular with the inventory you keep
At the onset of your business, be conservative when choosing the merchandise you want to stock up on. Just stock on the minimal requirements and from there, you should be able to make an assessment of the fast moving products. That way, you can stock up on those during the next order. Pick items that can be disposed of in a shorter period of time as compared to the credit term you have with your supplier.
Managing your working capital can be quite daunting and challenging. But with proper allocation of funds, you will be able to balance and budget your cash flow to ensure healthy working capital.
Photo Attribution:
Featured and 1st image by Stuart Miles / FreeDigitalPhotos.net
2nd image by Stuart Miles / FreeDigitalPhotos.net
3rd image by Stuart Miles /FreeDigitalPhotos.net
