Cash flow is considered to be the life-blood of any business. These two simple four-letter words can be the cause of oblivion or induce your business to thrive and survive. 82% of the business failure occurs due to the risk management in cash flow.
Moreover, if your business has effective working capital management, then it would surely make remarkable growth. Moreover, the high sales and the growing business can strain out your cash flow. It can upset the balance of your business working capital. Hence, it is a paradoxical challenge that every growing business experiences.
From any world-class enterprise to small business, working capital becomes the critical measure to access the long jump financial growth of the business. If the business has effective working capital management, it can minimise the cost of its working capital while optimising the operating cycle. Somehow it maximises the return on investment in the current asset.
The concept of working capital
The concept of working capital is not difficult. One can derive working capital meaning by measuring and managing the capital of your business through various activities of the business. All entrepreneurs are business organisations who should work towards balancing the assets and liabilities of a business. It can ensure operational efficiency. But to optimise this efficiency, one requires expertise in this task.
The four key activities in managing working capital include inventory management, cash management, account payable and account receivables. Generally, if your business comes up with a high level of working capital, it directs towards a healthy and well-managed business. Here are the five tips that can help you increase the working capital management for your business to be successful.
Set a target of the performance metric
Setting up a target can be the driving factor to manage the working capital. A business works efficiently when it focuses on optimising the working capital.
Reduction in inventory and the inventory turnover
Inventory is considered to be the asset of the working capital. To enable cash production, one needs to order the inventory needed for the customer’s sales and production. The business need not have to stock up the organisation with an inventory.
Converts the various electronic payables and receivables
The conversion has transformed the payment process of many business organisations. The electronic payment automated payment process opens after conserving the favourable capital. It says a lot about the cost reduction and the structure of the business. Electronic payables, including the purchase of cards, can sometimes offer a working capital increase.
Engage employees and share financial information
Corporate culture may create and support adequate working capital. The business should share various financial information with its financing or operations that impact the working capital performance. To experience growth in the business revenue, the business should make proper management in the working capital. It can be achieved when the business has a good culture and work environment. The owner of the business should define various strategic approaches with objectives and defined goals. These should be related to the management of cash, inventory and various payables and receivables.
Receive adequate financing
If you want to increase the working capital management, you can utilise the short term business loan. If you possess enough liquidity to finance your current operations, you are not required to take the excessive risk of taking loans from financial institutions. By determining the need for your working capital, you can direct the business to select the right and safe financial solutions carefully. It can also help you to forecast the adequate size of the fund that your business requires.
Moreover, instead of the short term business loan, you can also opt for financing the fixed assets that come with a long term loan. It helps to stabilise the healthy cash flow.