Here are a few great ways to manage your working capital like a real champion.
Avi Levine from Star Funding provides purchase order funding and other creative working capital solutions to manufacturers and distributors to help them operate more efficiently and achieve their goals.
Working capital is considered the lifeblood of product-based companies. Without the necessary working capital to purchase materials, pay your staff, or market your products effectively, you will find your company at a standstill. It’s true, most people don’t go into business to become their own bookkeeper or accountant, but as a small business owner you have committed to wearing many hats.
Many new manufacturers and brands struggle to manage working capital properly. If you can crack the code to smart working capital management, you will find yourself with a great competitive advantage. Proper management of your resources will allow you to fill larger orders without straining other areas of your business. Here are a few great ways to manage your working capital like a real champion.
First things first
Definition of working capital management by Investopedia:
A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.
How to Manage Working Capital Correctly
(1) What you BUY is just as important as what you SELL:
Getting stuck with inventory and materials that you don’t need is not much fun. Proper planning, modest projections, and strong negotiations should all come into play when you are managing your raw materials and inventory. Having excess supplies you can’t sell not only ties up capital and shelf space but will eventually require time and focus to liquidate and get rid of once they get stale. Limit your bad inventory by taking a conservative approach to what goods and materials you NEED to keep on hand.
(2) Manage with a cross-functional approach:
In addition to overseeing the bigger picture, you should also be looking at your business by category or department. It’s important to regularly analyze resources, cash, and working capital within each category or department to make sure they are not disproportionately tied up in any one area. This can involve maintaining AR aging reports and AP aging guidelines, as well as keeping certain operational expenses low.
(3) Keep more than one set of eyes on the books:
While your CFO or bookkeeper best understands the metrics to help you manage your business, they may not be as well-versed in the day to day as you or another key operational lead within the company. It’s important to review working capital from various perspectives. Examining the books from different points of view may allow for better insight into how to manage your resources. As a small business or startup, you may not have dedicated AP, AR, or inventory personnel. This doesn’t mean you can’t have another key employee “own” these areas and update the rest of the team with reports, concerns, or suggested adjustments.
(4) Plan and reassess on a regular basis:
As a small business, it’s sometimes easy to forget about looking back on and updating your plans and goals regularly. Although you will inevitably get caught up in routine operations, you need to make time to review your progress and, more importantly, look ahead at what’s coming down the pipeline. Carving out a few minutes for a monthly or weekly review of actual expenses and sales versus your estimated projections is a great place to start. Once you lose sight of your goals or stray too far from your path to profitability, it will be hard to get back on track.
(5) Prepare for a rainy day:
You never know when you are going to run into a situation like a cancelled order, a missed deadline, or an unexpected expense that requires a quick fix. Preparing for these random mishaps is never easy. Precautions can include emergency on-hand inventory, cash reserves for rent and overhead, or untapped availability on your credit line that you make a point not to utilize through the regular course of business. As a growing business, your first inclination may be to put all of your resources to work. It’s important to fight that urge by building in some cushion for yourself.
A Parting Thought
Working capital can be tough to manage, especially for small business with limited personnel. If you find yourself in a crunch, don’t go cutting payroll, dumping inventory, or aggressively collecting your AR just yet. Consider the effects of any changes or adjustments on the rest of your business. If you find yourself making rash decisions in reaction to low working capital, you may interrupt other areas of your business. Dumping inventory may inhibit future sales if you get rid of the wrong stuff, aggressively collecting your AR may have a negative effect on your customer relationships, and extending AP without prior approvals may upset your vendors and interrupt your supply chain.
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