Methods That Can Increase Your Small Business’s Working Capital

Methods That Can Increase Your Small Business’s Working Capital

As a city known to be a foodie paradise, tons of food and beverage (F&B) establishments open in Singapore City every other month. But only around 60 percent of them last more than five years. The remaining 40 percent don’t survive past that period, according to a 2015 report by SPRING.

Experts say that F&B businesses should adopt the latest technology to thrive in the industry. They recommend automation and robotics, self-service kiosks and mobile ordering, new payment methods, etc. But a business needs working capital to provide those services.

Sadly, insufficient working capital robs F&B businesses of the chance to innovate. Insufficient working capital and poor cash flow management are two reasons startups fail regardless of their industries. But where does working capital come from, and how do you avoid depleting it?

Understanding Working Capital

Working capital is the difference between your company’s current assets and current liabilities. Financial statements may label it as “net working capital (NWC).”

Your company’s current assets are cash, accounts receivable (e.g., customers’ unpaid bills), and inventory. On the other hand, your current liabilities are your accounts payable (e.g., utilities) and debts.

Your NWC is the backbone of your business. Without enough working capital, your company may lose its flexibility and good credit. In addition, NWC measures a company’s liquidity, operational efficiency, and short-term financial health. Hence, a positive NWC indicates that you can invest and grow your business. On the contrary, a negative NWC increases your company’s risk for bankruptcy.

Factors That Affect Working Capital

Your NWC will go up and down throughout your operations. You can monitor it by looking at your cash flow statement. The transactions you’ll see will let you point out the cause of your increasing or decreasing NWC.

Below are the factors that usually affect NWC:

  • Buying a fixed asset (e.g., new software)
  • Selling a fixed asset
  • Purchasing inventory with cash

To clarify what these factors suggest, buying a fixed asset will reduce NWC since it decreases a current asset, specifically cash. But your current liabilities won’t change because a fixed asset is long-term debt. Conversely, NWC and cash flow will grow if you sell a fixed asset.

Lastly, purchasing inventory with cash won’t change your NWC because working capital and cash are both current assets. Only your cash flow will decrease.

Effects of Too Much Working Capital

A high NWC isn’t always a good thing. It can indicate that your company has excessive inventory and is not investing its cash. You should strike a balance between having enough working capital and investments. A business can miss opportunities if it only keeps its cash.

If people are encouraged to avoid putting all their eggs in one basket, businesses should follow the same advice. You can buy new software, embrace automation, or branch out when you have enough NWC to spare. You may even pay your employees bonuses.

How to Increase Working Capital

You’ll face a bigger problem with insufficient NWC than an overflowing NWC. Thankfully, you can revive your NWC’s health through the following methods:

  • Bill Your Customers Early

If you’re a B2B business, don’t wait until the end of the month before charging your customers. Bill them as soon as you carry out your service or provide the products. However, don’t be hostile when you collect payment. You need to keep your customers happy to maintain their loyalty. But don’t foot their bill too long, or they may take advantage of your leniency.

  • Don’t Buy Fixed Assets With Working Capital

Suppose you came across an opportunity to build a branch in another city. You need to lease a new building and buy furniture, equipment, and inventory. Take out a business loan to finance these purchases instead of using your working capital.

If your company has a credit line, consider using that, too. Borrowing is not a bad thing for a business. It shows that you have good credit. Besides, the money will allow you to grow your business, resulting in higher sales and profit. Hence, the debt won’t endanger your company’s financial health.

  • Make a Personal Investment

You can use your personal finances to make an investment for your business. But first, do a cost/benefit analysis. You need to see the potential return you’ll earn from the investment. Your investment will be worth it if your business’s payoffs exceed its losses.

Maintaining a good working capital requires a steady cash flow and well-thought-out expenditures. And to increase it, urgent actions are crucial. Don’t wait for your working capital to reach a negative figure before acting. It doesn’t take long to replenish cash, but getting out of bankruptcy may take forever.

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