Every small business owner should know that managing working capital is essential to successfully running the day-to-day operations of their business. What are you doing to manage working capital in your small business? There are many options that you can choose from to manage the money you need to run your business, but a lot of small business owners often select ones that are expensive and not sustainable.
The main components of working capital are your inventory, accounts payables and accounts receivables. Each of them has two dimensions, time and money. If you are carrying too much inventory, and it isn’t “turning” in an optimal way, your working capital will diminish.
Equally important is how long you have to pay your suppliers and how quick you are being paid by your customers. If you can negotiate terms to extend or lengthen the time you have to pay suppliers, and collect your money quicker from your customers, it will have a significant and positive impact on your working capital.
Ensuring your credit is good can also help, as you can borrow money from a bank or use credit cards to help you manage working capital. Short-term credit card obligations can help extend the time you need to make payments to your suppliers by extending the due date that the money comes out of your bank
Increasing inventory turns, extending the time you need to pay to your merchants, and collecting money faster from your customers will all help you to manage cash flow. Insufficient management of working capital is the top reason small businesses fail, and understanding how to manage working capital in your business is a critical success factor for all small business owners.