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 common situation. On this page, we’ll go over how to identify if your company has enough working capital and how to improve your numbers if you’re struggling or are in danger of running into issues.
Step 1: Do the Math
Net Working Capital = Current Assets – Current Liabilities
Naturally, your net working capital should be a positive number. You’ll determine what yours is by adding up assets like your cash on hand and unpaid invoices. Then, you’ll subtract what you owe others from this number, such as payments on debt.
Working Capital Ratio = Current Assets / Current Liabilities
Simply knowing that you’re on the positive side isn’t enough. It’s important to know what your operational efficiency is, too. Calculate your working capital ratio. If it’s a 1.0 or less, meaning you’re paying out everything you have, that’s a red flag. There’s absolutely no wiggle room for you, which can be a major issue if clients don’t pay on time or you face an unexpected expense. Conversely, 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.
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 Interstate Capital helps companies with. We provide invoice factoring services, which means we give our clients money for their unpaid invoices, then collect from the business that owes. Additional strategies that can help invoices get paid faster include:
- Billing immediately after the service/ product is 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 your inventory counts are enough to see you through, but if you have excess, hold off on purchasing more items or producing more goods until your stockpile depletes.
Step #4: Examine Your Vendor Options and Look for Savings
No matter what business you’re in, you need resources to complete your work. For example, if you’re a trucker, you’re paying for gas and maybe even subscription to load boards. At Interstate Capital, we offer our transportation clients access to a free load board and have fuel discount cards that can help. If you’re not a client or own a business outside the transportation industry, see if there are ways to cut vendor costs. Bear 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.
Step #6: Automate and Outsource
Everything from invoicing to payroll can be automated, saving on expensive labor costs and reducing errors. It may also be worthwhile to look into outsourcing specific business processes or jobs, saving on the expense of maintaining an in-house team while giving you expert help.
Step #7: Work with Specialists
Tax specialists can help ensure you’re minimizing your liabilities, so you keep more money in your pockets. Working with a tax specialist can pay for itself if you’re overlooking even one minor thing. It may also be advantageous to bring on an accountant, either to do a one-time review or to schedule regular reviews of your accounting practices and areas of opportunity.