Tips for Managing a Business with Low Working Capital

It is an unfortunate scenario when you have to continue business operations with low working capital. Not to mention, this is a situation when both management and employees begin to panic. If no action is done forthwith to be in the driving seat, your employees will leave you like rats leaving a sinking ship, and soon it will be all up with you.

It stands for the reason that you will have to call for a meeting to brainstorm ideas to ramp up working capital to hit the ground running quickly. However, a sensible entrepreneur would prefer to be proactive, meaning you should not let this situation crop up to face.

It cannot come as a surprise that most of the businesses fail to realise what they are at risk. Early on, the lack of careful planning forces you to put on thinking caps when working capital becomes low.

Ways for Managing a Business with Weak Working Capital

If you have been caught on the wrong foot, you should put the brakes on other activities and utilise the moment to think of ways to do over cash flow. Given below are some methods that will guide you to do so.

1. Examine your business practices

Identify if your business practices work in your favour. In order to build a strong relationship with your clients, hope that they will go a long way. You become a bit generous with your business policies, such as allowing some more time to clear dues, which blows your working capital.

Practically, there are better approaches than this. To gain one thing, you are losing another and something that fuels your business. This is a simple example to make you understand how seem-to-be-the-right-thing can work against your business.

Likewise, you need to analyse other aspects, like the utilisation of human capital. It has been noticed that entrepreneurs trim down their workforce during a time of uncertainty. It not only leads to an unbearable load on existing staff but also removes the scope for exploring new opportunities.

2. Optimise your software

You will have to create a controlled environment to ensure that you have enough working capital to run your business smoothly. All the decisions that you make affect your working capital, so it is crucial to have software that allows you to access real-time data, which helps you make decisions immediately when you see a decline in cash reservoirs.

Make yourself ask the following questions:

. What kind of software will be suitable for your business needs?

. Are you able to make the most of it?

. Have you got complete control over everything?

As you know that whatever your business goes through will have a direct impact on your working capital, you should carefully analyse the effect before you dive in.

3. Focus on your accounts receivables

One of the biggest reasons for struggling with working capital is that your invoices are not paid on time. You will need to analyse the cash conversion cycle, which is generally not more than 90 days.

However, in the case of small organisations, it is not more than 30 days. In the event of weak working capital, you will have to shorten the cycle. You must have funds before you are liable to pay your creditors.

Do not forget that you might have other debts as well. You should have money ready to pay them off on time. However, it is likely that you still struggle to recover money from your debtors. If you need to invest in a good project, you can take out working capital loans in the UK.

Ask yourself the following questions to have clarity about your cash conversion cycle:

. How many clients pay you on time?

. How long is your cash collection cycle?

. How often do your clients pay – in two instalments or three instalments?

. Are you in a situation to offer cash discounts?

If your working capital is threatened, you should reduce the length of accounts receivables. Try to impose late payment fees who miss the due date. Avoid paying discounts even if you get money before or on time.

If you want to buy equipment, it makes sense to avoid offering as many rebates and discounts as possible. For instance, if you are a dentist and you are to perform surgeries and treatments, you can accept payments in instalments but within a short time.

Getting money into your pocket sooner rather than later will help you buy equipment. If you are to consider dental equipment finance, you should have enough money to prove your repaying capacity.

4. Negotiate with your vendors

Once you have taken stock of your cash inflow, you should talk to your vendor to see if they could allow for some more time to clear dues. At this time, you are a cash conservative, so you would certainly want to retain cash for a bit longer time.

Sometimes you just need a little extension to allow for the smooth flow of a business. Figure out the vendors with whom you have strong relationships. Talk to them and seek for little extension. You never know if they could allow you a bit more time to arrange your cash.

If you have cleared all dues on time, you will be able to get the extension. Try to contact only those vendors with whom you have built a very good relationship. However, you still cannot expect each of them to concede to your proposal.

To Wrap Up

It can be quite difficult to manage running your businesses with low working capital. Therefore, ensuring that your working capital is in good condition is required. Assess your business practices because sometimes they could weaken them.

Ensure that you get your invoices on time. Try to shorten the convertible cash cycle, so you do not struggle to meet business operations. If you still struggle to improve it, talk to your vendors to see if they could extend the repayment term.