Improving Your Business’ Working Capital
Your business’s working capital is determined by subtracting your liabilities from your assets. Working capital calculations should be done on a weekly basis to give you a good idea of where you stand and what you can improve. The more working capital you have, the more you can put towards bigger projects, invest in new equipment or even move to a new location. You can improve your numbers by looking at both your liabilities and your assets to see what can move in which direction.
Accounts Receivable and Payable
Accounts receivable are the outstanding invoices that are being paid to you and accounts payable are the ones being paid by you. The longer your customers are taking to pay their accounts, the less funding you have available to pay yours. This means that you should keep on top of payment reminders, keep track of which clients are the best and worst at making timely payments.
The same goes for your accounts, if you are late paying your suppliers, then you are likely to rack up late fees that cut into your bottom line. You can also keep up on the terms of repayment and try to negotiate better prices.
Expenses and Supplies
Working capital has a lot to do with your expenses and supplies in that those are both costs that come from that fund. The more expenses you have on a monthly basis, the fewer supplies you can afford to purchase and vice versa. It is also a good idea to keep your eye out for ways to save on both fronts with one purchase. For instance, if you can switch to energy-saving equipment when you upgrade, then you can save on your electric bill in the long run.
Tax Opportunities and Credit Risks
Keeping your eye on the changing tax codes can really help you save money for other projects. Maybe there is a new tax incentive or deduction that you can take advantage of this year or one you can work toward using next year.
You should also calculate the credit risks of your customers or distributors as well as the risks you take when applying for credit yourself. Both areas can land you in repayment troubles from different sides of extended credit.
Working capital is the funding you use daily to keep your company running. It is calculated by subtracting your current liabilities from your current assets and represents the funding you can quickly bring to fix a problem or start a new project. The closer you keep track of both your assets and liabilities, the healthier your capital will be.