Every start-up needs to have a decent amount of capital to set up the business, to cover the costs of paying employees, overheads, taxes and more. This is usually referred to as starting capital. Another important type of finance is working capital, also known as operating liquidity. This is how much money a business can deploy quickly, for daily operating purposes. Every SME needs strong working capital to be able to grow, and there are a few ways to improve yours.
- Set Cash Flow KPIs
Poor cash flow situations are the main reason a lot of start-ups fail. If a business doesn’t have enough money coming in at the right times to build and expand, then it can get stuck in a rut and be unable to afford even the essentials to keep operating, such as paying staff, for materials and other useful services.
A great way to ensure your cash flow remains on course and working capital stays steady is to set and monitor cash flow key performance indicators. Increasing the visibility of finances, especially in supply chains, will highlight any areas for improvement, to grow working capital and prevent losses. Make this the responsibility of one of your team members to report back on it each week or month, to avoid any problems.
- Limit Expenses
Spending too much is one of the main reasons working capital can dip. Therefore, making cuts in the right places to better manage your business finances is vital. This could be through negotiating with new suppliers, as well as when purchasing office equipment and supplies.
Expenses are a big area too, and you should review where they are being spent. It may turn out that a lot is being wasted on unnecessary expenses on business trips, so setting limits can be a good idea. This should see outgoings drop and working capital increase.
- Offer Payment Incentives
Sacrificing a small percentage of the payments you are owed may not seem like the best way to improve working capital, but it can be. For example, providing the incentive that clients and customers can save 1% on their invoices if they pay within ten days, rather than 30, cam provide more gains for working capital than the problems late payments create.
The same is true for offering more payment options. You may have to pay charges for accepting credit cards, but it can ensure you receive the working capital faster. Use these three tips to improve the working capital for your SME.