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4 Ways Small Businesses Can Effectively Manage Working Capital

May 24, 2024 - May 24, 2024   

One crucial financial process for any business is managing working capital effectively. After all, working capital encompasses all the monies required to keep the company operational every day, week and month. With cash on hand to meet short-term obligations, a business can be in a better position to maximise cash flow through the efficient use of its business activities.

Not correctly managing working capital can have long-lasting negative consequences that impede a business’ overall strategic goals. Moreover, if you are a small business wondering how to manage working capital effectively, follow these four tips.

1. Continuously monitor your KPIs

Your key performance indicators (KPIs) are what provide measurement criteria on how specific areas of your business are performing. This puts you in a position to make informed decisions when it comes to managing your working capital effectively.

Monitoring your KPIs should be the responsibility of everyone. You’d be surprised to find that your staff thinks anything working capital-related is left to the person in charge of business finances. However, this is not a sustainable approach, and they should be educated on the importance of the task at hand.

2. Pay vendors on time

Although you can have more working capital when you delay paying your suppliers, the long-term blowback is not worth the risk. As much as suppliers need to keep you happy, this relationship dynamic works both ways and can lead to long-term savings if handled well.

A happy vendor is a flexible vendor, and they may be more willing to negotiate payment terms, leading to discounts, when they are not too busy hounding you to pay an invoice.

3. Watch your inventory

The more stock you buy, the less working capital you have on hand, meaning you need to manage your stock effectively. You have to make sure your inventory is balanced; it shouldn’t be too high or too low because both of these scenarios can present significant problems.

When you overbuy, your money is tied up in stocks and can severely limit your cash flow.  There is no telling what can happen should the demand for your product offerings decline. At the same time, you should not understock to the point of forcing customers to seek out your competitors.

4. Speak to an alternative lender

When you are dealing with an overhead in your operational costs, going to the bank for a short-term loan can help get you back on your feet. However, UK banks are reluctant to lend to small businesses these days. On top of that, with their less-than-generous interest rates, you would be putting yourself at moderately high risk.

However, with alternative lenders being more flexible, small businesses can negotiate favourable terms and get the best business loans in the UK.

The importance of managing working capital cannot be overstated – it is crucial to the survival of your business. You can approach the issue in numerous ways, but as long as you have enough to fund the short-term operational needs of the company, while also investing in growth and profitability, you are managing your working capital efficiently.

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