The working capital is one of the biggest points of concern for any business. Big or small, enterprises need to maintain a healthy flow of working capital. Although business experts say that negative working capital doesn’t necessarily mean the business is doomed, it should at least keep the sales and account managers on their toes.
What Is Working Capital?
Working capital is the cash fund that sustains your everyday operations. It is a measure of a company’s liquidity: higher working capital means a company’s earnings are greater than its liabilities. Working capital is used to pay off short-term debts, buy inventory, and pay for everyday operating expenses.
When the working capital is running short, businesses apply for working capital loans from banks or non-institutional lenders.
If you look up working capital loan definitions and uses, you’ll notice that many consider it a short-term remedy to cover the costs of daily operating expenses. It’s mainly because working capital loans must be repaid in less than a year. Businesses, therefore, cannot depend on working capital loans for long-term funding needs.
Manage Your Working Capital to Maximize Working Capital Loans
Businesses that get approved for working capital loans must work doubly hard to regain their financial health. They need to maximize their loans and generate revenue from them so that they can pay the loan on time and have a net income.
For business owners and entrepreneurs who want to avoid risks, the goal regarding working capital should always be to avoid deficits.
How do you manage your working capital loan? Here are some tips:
1. Be smart in stocking inventory
You have to closely examine if the cost-savings from bulk-buying a raw material is more beneficial than equally distributing resources for purchasing all materials needed for production, for example. If you are a retailer, you’ll want to increase the inventory of your in-demand products to make sure that you don’t run out of stocks and potentially shake the confidence of long-established partners and customers. Similarly, you don’t want to waste money on stocks that don’t sell well.
2. Prioritize your key suppliers and pay them on time
This is to ensure that your business relationship stays strong. If you have a good relationship with your vendors, you’ll be in a better position to negotiate for more favorable contracts later.
3. Follow-up on your receivables
Make sure you’re sending invoices on time and take note of delinquent payments. Not to say that you must be aggressive in collecting delinquent payments, but neither should you be too lax that others are taking advantage of your generosity. Draw the line between gestures of good faith and savvy business management.
4. Increase your working capital
Look for other ways for your business to increase its income besides improving your process for receivables. Some options you can consider are selling long-term assets, refinancing debts, making personal investments (i.e., put your personal money into the business), and getting equity funding by inviting investors to your business.
Contact Probably Yes for More Information on Our Working Capital Loans
Managing your working capital, especially the funds you receive from a working capital loan, is crucial for ensuring your business’s success.
If you need to increase your working capital as soon as possible, consider applying for a working capital loan from Probably. We specialize in financing startups and expansion plans of small businesses.