How to Improve Liquidity and Working Capital

Adekunle Oludele
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1.3K Views
Nov 24, 2022

Working capital is a certain amount of money that indicates how much your current assets exceed liabilities. It is the cash you have in hand and can use for fulfilling needs, paying workers, and taking new orders. If you wish to learn how you can improve liquidity and increase your working capital, you are in the right spot. Today, we shall look at several ways this can be done so that you have more cash for the tasks at hand.

Is It Possible to Improve Working Capital?

Assessing your current financial situation is the first step you must take if you wish to increase your working capital. This can be done by asking several questions so that you can work on improving working capital management. These include:

Can the business model be improved to eradicate/minimize added expenses and payment delays?
Can contract terms with clients be adjusted to eradicate unnecessary costs?
Is there an alternative method to run the business that will require much less working capital but will not harm revenue generation?
Can assets be leveraged further for additional funds?

If your answer is yes to any of the questions above, there is room for change. Increasing working capital means greater business success and fewer additional costs. Here are some ways you can do this:

Filing Invoices At Scheduled Times

A business operation cycle begins when you start working on any project and only ends once you receive payment from your client. The time limit between these two points must not be too long. Sending your invoices as soon as work is complete instead of waiting for weeks to do so will hurt cash flow and profits

Most industries call for invoice filing in a time slot between 15 and 60 days. Try to follow the average time in your niche so that the time duration between project completion and invoicing is reduced. Delayed payments mean longer operating cycles, leading to poor liquidity and income loss.

The accounts department must be ordered to monitor all past dues to be cleared in time to keep the cash flow stable.
Inquiries must be sent if payment is not made within the set time frame. This also allows a company to see what troubles a client is facing that are causing payment delays.
Payment reminders are a great way to ensure you get paid on time. Automating this process will also take away the burden on account managers and reduce time wastage.
Customers should also be able to pay ahead of time in exchange for small incentives.
A late fee penalty can be put into effect to encourage clients to pay on time each month.

Reduce Additional Costs

Another way to increase working capital if you cannot acquire extra money is by working towards cutting down unnecessary costs. Make sure to assess your budget first and break down each part into defined components. This way, you can see if you are spending too much on one department or service. Ask the HR and management teams to create office rules restricting futile spending.

It is also a good idea to calculate business trip costs and look at utility bills to see if it is possible to cut down costs. Once you see your working capital improvement, you will be surprised to know how these cuts can make a huge difference.

Boost Revenue

This is an obvious one but quite the most essential. Increasing profits and revenue means you will have more working capital leftover for business tasks. Focus on getting new clients and projects and look for new opportunities through marketing channels.

Always set product or service prices by considering sales and profit margins. This will keep your rates workable, reasonable, and profitable. However, it is necessary to remember that business cycle length can prevent profits from coming in at the right time to cover billing costs. If this is an issue you face, then working on cost reduction alongside is your best bet.

Manage Inventory

Each unsold product in your inventory or one lying around in a warehouse is a stack of money waiting to be sold. The greater your unused inventory is, the less the business liquidity is. Due to this, your business will also become less competitive and agile.

Make sure to time supplies and only order products you need or are sure will sell out. You can also make use of inventory management software as a tool to help manage your inventory perfectly. Converting inventory into the money faster means you have less capital knotted up. You will also be able to cut down on warehouse expenses and other utility costs.

Endnote

There are several ways to improve working capital to gear your business toward success. However, research and proper input are required by bringing all departments on board. Ensuring all employees work together to boost working capital is your best chance at success.