If your business is running short on working capital, it can totally derail operations and add to your stress. The good news is there are lots of ways to remedy this all-too-common situation.
Many business owners assume that a loan or credit line alone can solve their working capital challenges. Before putting yourself further behind, start with some simple, repeatable steps that can give you a better sense of your working capital numbers.
You might find that some tweaks in a few areas can help increase the amount of working capital you have available for your business.
Step 1: Do the Math: How to Calculate Net Working Capital
Net Working Capital = Current Assets (minus) Current Liabilities
Naturally, your net working capital should be a positive number. Figure out yours by adding up your assets, like your cash on hand and unpaid invoices. From that number, you’ll subtract what you owe, such as payments on debt.
Working Capital Ratio
Working Capital Ratio = Current Assets / Current Liabilities
A positive number is a good start, but there’s more to it than that. What you really care about is your working capital ratio. Calculate your working capital ratio by dividing the same numbers from above. If it’s a 1.0 or less, that means you’re using all your working capital resources.
This leaves you with absolutely no wiggle room. What if a client fails to pay you on time, or some other expense comes up?
If you rise above a 2.0, it could be a sign that you’re not making the most of the cash you have on hand. You might want to look over your budget and see if you can invest in things that will help you grow, like new equipment or marketing.
Your working capital ratio will likely go up and down depending on your industry or your company’s growth plan.
Step #2: Get Invoices Paid Faster
Many small businesses have huge amounts of money tied up in unpaid invoices. This is one of the things Triumph Business Capital helps companies with. We provide invoice factoring services, which means we advance our client’s money for their unpaid invoices, then collect from the business that owes you.
If you’re not yet working with a factoring company, here are some additional strategies that can help get you paid faster.
- Billing immediately after the service/ product is completed or delivered. Don’t wait until the end of the month.
- Providing an incentive for early payments.
- Establishing a penalty for late payments.
- Making it easier on clients to make payments by providing an online payment portal.
- Automating the billing process and sending out regular reminders.
Step #3: Check Your Inventory
Technically, inventory counts as an asset, but you can’t always count on it to pay your bills. Make sure you have enough inventory to get you through your projected sales, but if you have a garage or storage-room full, hold off on purchasing more items or producing more goods until you can clear out some of it.
Step #4: Review Your Vendor Options and Look for Savings
No matter what type of business you own, you need resources to complete your work. For example, if you’re a trucker, you’re paying for gas and maybe even subscriptions to load boards. At Triumph Business Capital, we offer our transportation clients free trials to premium load boards and a TMS (Transportation Management System), along with fuel discount cards that can help save at the pump.
If you’re not a client or own a business outside the transportation industry, see if there are ways to cut vendor costs. Keep in mind, you may not have to leave your current vendors to get a discount. Just as you may offer a discount for early payment, many other companies offer the same, or might give you a discount for setting up automatic payments.
Step #5: Evaluate Your Fixed Expenses
Making monthly payments on things like rent or company vehicles? See if there are ways to reduce these costs. You may be able to refinance to get better rates or find less expensive options.
Make sure you’re taking a day out of every month – or at least once a quarter – to evaluate these expenses. You might surprise yourself with what savings you can find.
Step #6: Automate and Outsource
Everything from invoicing to payroll can be automated and can save you on expensive labor cost and reducing errors. It may also be worthwhile to look into outsourcing specific business processes or jobs.
Working with a factoring company is a quick way to push off costly and time-consuming processes like invoicing and collections. You get an advance on your invoice and back-office support included.
Step #7: Work with Specialists
You started your business because you are an expert in that field. Whether you started a staffing firm specializing in IT professionals, or you own a large janitorial company that services Fortune 1000 clientele, you know your business.
But nobody knows everything about business, especially when it comes to taxes, payroll or even setting up your business correctly.
Tax and legal specialists make sure that you’re minimizing your risk, so you keep more money in your pockets. Working with specialists can pay for itself if you’re overlooking even one minor thing. You’ll need to work with an accountant regardless to keep your books straight, and as you grow, it might be helpful to hire an accountant who can maintain your finances year-round and keep you on top of important deadlines, like paying quarterly taxes, etc.
Leverage factoring services from Triumph Business Capital
As a business owner, you know how important it is to have positive cash flow. We’ve gone over seven ideas for increasing your working capital position. In order to maintain and improve your finances, you have to be proactive about knowing what’s coming in and what’s coming out. Many of the suggestions above are related to what you can directly control.
But what about when clients take a month or more to pay? If you’d like to leverage invoice factoring as a method to improve your working capital, we can help. Contact Triumph Business Capital for a your free factoring rate quote or learn more about invoice factoring today.