Discover How to Improve Working Capital With These 7 Strategies
Financial strain is a common challenge for many small businesses. According to the Federal Reserve's 2024 Small Business Credit Survey, 56% struggle to cover operating expenses, and 51% deal with uneven cash flows.
If your business is facing similar hurdles, you’re not alone. However, you can minimize or overcome them by learning how to improve working capital.
In this article, you’ll learn more about working capital, including the actionable strategies you can use to better manage and improve your working capital position.
What Is Working Capital?
Working capital is the cash your business has available to meet its short-term obligations. This is how you calculate your working capital position:
Net working capital = Current assets - Current liabilities
Your current assets include what your customers owe you, the inventory you own, the money you have in the bank, and assets you can quickly sell for cash.
Your current liabilities are what you owe your suppliers, your employees, and the tax authorities. It also includes debt you need to repay in the next 12 months and any dividends to shareholders.
If your current assets are greater than your current liabilities, you have positive working capital. If it’s the opposite, you have negative working capital.
How to Improve Your Working Capital
If your business is consistently in a negative working capital position or is only narrowly positive, a working capital improvement program can help you create more of a cushion.
To get started, follow these eight practical working capital optimization tips.
1. Get Paid Faster to Boost Your Cash Flow
If your company is profitable on paper but your bank account balance tells a different story, you may want to look at your invoicing and customer payment process. Getting paid faster can help you improve your liquidity.
To improve your cash inflows, try these proven strategies:
Invoice immediately: Send invoices out as soon as you’ve shipped the goods, hit a project milestone, or completed a service. After all, sending the invoice is the first step toward receiving payment.
Offer early payment discounts: Entice customers with a discount. If you send out your invoices on standard net-30 payment terms, incentivize them to pay within 10 days by offering a small discount (like 2% or 3%). The time between sending an invoice and getting paid is called “days sales outstanding,” and it’s a key working capital management metric.
Digitize your process: Use accounting and bookkeeping software to automate and streamline your accounts receivables workflows. For example, send automatic payment reminders to customers a week before their payment is due, three days before, and again on the due date itself.
Be proactive about late payments: Set expectations upfront about your late payment policy and the consequences of missing the due date, such as late fees or delayed order fulfillment. Also, make sure you’re following up consistently with late payers and upholding your policy.
Take a deposit: It may make sense for your business to get a cash deposit upfront. It helps your working capital, and it’s a sign that the customer is as committed to the project as you are.
Offer multiple payment methods: Try to make the payment process as frictionless as possible by offering multiple payment methods. In addition to accepting check and credit card payments, add a B2B buy now, pay later option so you can receive payment in full while your customers pay in installments.
2. Delay When Money Leaves Your Account
Holding onto your cash for as long as possible gives you more capital to meet unexpected bills and cover your short-term costs.
Here are a few ways to have more control of your accounts payable and manage your cash outflows:
Improve your supplier payment terms: Ask supply chain partners to increase your credit limit and extend your payment terms to 45-60 days. This allows you to preserve your cash flow for longer.
Pay only when due (or close to): Avoid paying early, unless you will receive a discount. However, make sure you pay on time so you stay on good terms. The better your relationship with suppliers and vendors, the more you can rely on them when you need a favor, like rushing an urgent delivery or holding back stock for you.
Use short-term debt: In slower months, use short-term financing like business credit cards, business lines of credit, or working capital advances to preserve cash and manage your short-term liabilities. You might also earn rewards or cash back.
3. Manage Your Inventory Levels Better
The quicker you turn stock into cash, the stronger your working capital position.
To get there, work on these two metrics:
Get your operating cycle down (how long it takes to turn inventory into cash)
Lower your cash conversion cycle (how quickly you turn products or services into cash)
Here are a couple strategies to help you do this:
Adopt just-in-time inventory management: Only order new stock when you need it based on your real-time sales data and any sales forecasting tools you use. Avoid the temptation to buy extra when there’s not enough demand to sell it quickly.
Identify slow-moving stock: Discover which stock items customers want but don’t buy very often. When the time comes to re-order, put in a smaller order so you still have the stock on hand to make sales without over-investing. This will boost your financial health by freeing up cash for other uses.
4. Cut Unnecessary Expenses and Save Over the Long Term
The less you spend, the easier it is to cover your liabilities each month. Getting rid of non-essential expenditures means you’ve got more room to maneuver when sales slow or margins tighten.
You may be able to save money each month with these three tips:
Try zero-based budgeting: With zero-based budgeting, every dollar spent has to be justified each month. For example, if you usually spend $5,000 a month on Google Ads, you would look at the ROI each month to decide if that expense should continue or if the money would be better invested elsewhere.
Outsource non-essential tasks: Look for tasks that may be more cost-effective to outsource. If your staff is bogged down with administrative tasks, it may be better to outsource the non-essential tasks so your employees can dedicate their time to work that helps move the business forward.
End unnecessary subscriptions: Check your bank and credit card statements to find out how many tools, platforms, or services you’re subscribed to. Ask your colleagues how many of them they really use and cancel anything that people no longer rely on or has been replaced by something else.
5. Make Forecasting Part of Your Daily Routine
If you don’t know for sure or can’t accurately estimate what will be going in and out of your account in the coming days and weeks, you can’t plan. Business owners in that position are more likely to make panicked decisions — such as cutting back on the marketing budget just before a seasonal sales peak — because they think they’re running out of cash.
Follow these techniques to improve your cash flow forecasting:
Create rolling forecasts: Combine real-time data from sales, accounts receivable, and accounts payable to estimate your cash flow. This will also help you spot when you may have enough money to, for example, upgrade your IT systems or invest in a new market.
Use AI forecasting: Use the AI and machine learning tools available in your business apps, such as your CRM and ERP software, to adjust your rolling forecasts based on changes in customer demand, delayed payments, or seasonal ebbs and flows.
Track important financial metrics: Your accounting software can help you monitor for swings in your company’s current assets and liabilities to protect your cash position and ensure you can cover day-to-day operations.
6. Use Financing to Protect Your Cash Position
Strategic financing lets your working capital stretch further and gives you more financial flexibility.
Here are some smart ways to use financing in your company:
Pick the right funding for your need: Use short-term financing options to bridge cash flow gaps when an influx of capital is just around the corner. Save long-term loans for investing in your company’s future or in an asset with a longer useful life, such as real estate or machinery.
Open a flexible credit line: Having access to a business line of credit or an overdraft can act as a safety net if you’ve got a lot of cash going out and are expecting delays on cash coming in.
Refinance to cheaper borrowing options: Keep an eye out for lenders offering cheaper loans, lines of credit, or credit cards, and switch to them if possible to reduce your monthly repayments.
7. Ramp up Your Revenue
The more reliable your business income, the less you need to take on debt or cut costs to maintain your financial stability. This drives up your operational efficiency, as you’ll be maximizing the return you’re making on your resources.
Here are some ways you can improve your sales figures:
Target profitable market segments: Use your CRM to find the customer groups that purchase the most from you and target them with special offers and loyalty programs to push up their lifetime value.
Use dynamic pricing: Invest in software that monitors your competitors’ pricing and automatically adjusts your to strike a balance between the highest margins possible and giving your customers the best deal.
Sell what you don’t need: Sell hard-to-move inventory at a discount to customers, or part with assets you aren’t using, such as spare equipment.
Optimize Your Company’s Working Capital With Backd
Managing working capital helps you feel more in control of your finances and gives you a view into where your cash flow stands at all times. Use the strategies above to increase your current assets and decrease your current liabilities — such as speeding up your receivables, reducing your expenses, managing your inventory efficiently, and having flexible financing on hand.
Backd offers two types of funding for small businesses wanting greater control over their working capital:
Working Capital Advance: Access between $25,000 and $2 million (minimum one year in business required).
Business Line of Credit: Borrow between $50,000 and $750,000 (minimum two years in business required).
To be eligible for our lending solutions, you must be based in the U.S., have established business credit, have a brick-and-mortar address, a minimum credit score of 650, and a minimum monthly revenue of $100,000.
Apply now and receive a funding offer within as little as 6 hours.
