New business owners are understandably concerned with finding the start-up money needed to get their enterprise off the ground. However, some entrepreneurs and small business owners make the mistake of neglecting to consider the working capital they need to grow.
You spend working capital on initiatives such as product development and new market penetration. Integral to business growth, these initiatives often take time before they return significant revenues. It's easier to determine how much working capital you need if your business is established, and you can review revenues and expenses over a 12-24 month period.
However, new businesses may have to use industry benchmarks and develop detailed projections to create a target for their working capital. Once you have established your target amount, you need to get your bank account to match that number.
Here are three tips to help reduce expenses, increase cash flow and avoid surprises.
Maintaining a large inventory can tie up a significant portion of your working capital. Rather than stockpiling supplies and products, shift your business to the just-in-time model. Under this system, you time supplies and new products to arrive right when you need them. This lets you avoid overbuying or paying to store large quantities of items.
While just-in-time inventory schedules can free up working capital, there is also an inherent risk in waiting for something to arrive at the last minute. Have a back-up plan in case there are any disruptions in your supply line.
Reevaluate Invoicing, Collection and Payment Procedures
Reducing expenses is one way to free up working capital; the other is to increase revenues and streamline your cash flow. While increasing revenues takes time, you can ramp up your cash flow in relatively short order.
If you wait weeks to send out invoices, you may be waiting too long. Bill clients and customers as soon as possible after services are rendered and reconsider how long you can wait for payment. In the past, 30 days may have been the norm, but in many industries, it is not unreasonable to request payment within 15 days. At the same time, try to stagger your payments to vendors or negotiate more favorable payment terms on your end.
Keep a Close Eye on the Future
Finally, strategic planning is critical to maintaining a healthy store of working capital. You should carefully consider your capital needs for the next year or even longer. For example, if you own a franchise, understand when and what type of upgrades your franchisee requires. Likewise, if you have seasonal slowdowns, these shouldn't be a surprise. Map out your businesses future and plan to set aside or obtain working capital to meet your current goals and prepare for future growth.
Managing your working capital takes time and effort, but it is a critical component if you want to grow your business and take advantage of opportunities as they arise.
Maryalene LaPonsie has been writing professionally for more than a decade on topics including education, insurance and personal finance. She holds a Bachelor's Degree in Political Science from Western Michigan University.
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