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Working capital is the amount of money a company has to do business with, or the company's assets after subtracting its liabilities. In order to improve working capital, you should strive to lower your liabilities and increase your income. One of the best ways to do this is to improve collections. You should also strive to lower inventory amounts if at all possible. Trying to find ways to lower costs and improve profit margins can help improve working capital as well.
Nearly every business wants to improve working capital at some point. If your business has investors, the investors will look at your working capital in order to see if you can repay your creditors. This means maintaining good working capital, or striving to improve working capital, is often one of the main goals of a business owner.
The formula for determining working capital is current assets minus current liabilities. This means that to improve working capital, you need to increase the amount of revenue that you bring in and decrease the amount of liabilities that you have. If you can do this successfully, your working capital will improve.
One of the most effective ways to increase your current assets is to improve the collections process. Regardless of how much you sell, you cannot be successful unless you collect money from your customers. If you are not being efficient in your efforts to collect what you are owed, you should put an emphasis on this part of your business. You may want to review your collections policies and see if there is a more efficient way to handle this.
Another thing that you should focus on is lowering inventory. When you have a great deal of inventory sitting around, you are leaving a lot of your money tied up. You should look into ways to be more efficient and cut down on the amount of inventory that you have to keep. You may want to consider an inventory system that keeps only what you need and allows you to increase your inventory quickly on demand.
You should also spend some time finding ways to lower other costs. Evaluate your monthly bills and determine if there is anything that you can cut out those items that are not completely necessary. For example, you might decide to handle all communications via e-mail or instant messenger instead of paying for a phone for every employee.
Another good way to improve working capital is to improve your profit margins. You could potentially negotiate better prices from suppliers in order to lower costs. Raising prices and increasing orders can also be beneficial.
@Vincenzo -- that's good advice and businesses need to set policies for dealing with collections on the front-end instead of when it is too late and cash is short. There is some fear of driving off customers that way, but consider this. If you buy something, don't you expect to pay for it as soon as it is delivered? If you expect that, why wouldn't your customers? It's just business, after all, and most reasonable people understand the need to get paid when goods or services are rendered.
Ah, it's the "collections" part of business that is often difficult, especially when you are talking about a small company that runs on close, personal ties with customers. It can be tough to go to someone who views you as a friend and lean on them for cash, particularly if they are going through a tough time.
The best thing to do is to avoid getting into a position where you are too close -- in a personal sense -- to customers. However, a lot of businesses having to rely on collections to improve cash flow have already let that horse out of the barn.
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