One of the greatest stresses of running a business is maintaining enough liquidity to meet daily expenses. You are always caught in a dilemma about whether to spend the cash on long-term goals or short-term needs. The outcomes of such a decision could severely affect your business’s viability and performance.
You can always rely on the working capital ratio (WCR) to ensure you make the wisest decision. As a financial tool, it helps you reserve enough cash for expenses while planning long-term ventures like growth and machinery investment.
Without financial knowledge, it can always be challenging to know how to improve the WCR; therefore, you need accountants and some financial experts to help. However, you can study some basic tips to improve the WCR and hire experts once your business grows. For starters, here are a few tips to help.
1. Increase Cash Collection Cycles
The cash owed by various clients can significantly lower your capital ratio. Therefore, you must work on your debt and receivable collection to boost your working capital ratio and cash assets. The strategic collection will help you increase your ability to meet other cash obligations.
To do so, you should structure the invoice and payment processes. First, shorten the duration customers take to pay the invoiced amount. To make that more efficient, send the invoice instantly when the customer receives their goods.
Next, streamline the payment method to adopt easy-to-process methods. Instead of cheques, you can opt for bank transfers and other online payments to ensure you receive your cash fast. Normally, cheques and other payments must be verified, delaying cash reception.
Finally, you can advise your customers to consider paying in advance instead of waiting for the goods and invoice. Use this approach if you have loyal customers and those you have worked with for years. Finally, consider pay-on-delivery instead of invoices and promissory notes.
2. New Inventory Management Practices
The amount of inventory you hold can affect your rations. If you hold too much, you weaken the ratios; if you hold less, you can easily affect cash availability. Therefore, you should be diligent with your inventory management cycle to maintain a reliable and perfect ratio.
Order what is needed and only store what is on demand. Use various market analytics systems to help you determine how much goods you are holding in your warehouses in anticipation of peak periods. An effective stock management and forecasting system can help you easily monitor your inventory.
These practices can help you maintain more liquid inventories while reducing liabilities. One of the best strategies is to store fast-selling products easily convertible into cash. The other products should be in your long-term inventory books and should not overwhelm more liquid assets.
3. Work On Your Expenses
The first goal is to ensure the company spends only on what is essential rather than everything. Remember that these expenses significantly impact your cash volumes, which are essential to your daily operations and staying afloat. Therefore, structure your expenses effectively.
Begin by using supplementary and complementary items to replace the capital-intensive ones you have. Such a decision will help you reduce certain expenses, especially when the supplementary product is as perfect as the original one.
Secondly, negotiate the best prices with the suppliers, ensuring you do not pay the excess. Instead of paying on delivery, you can opt for other payment methods like promissory notes to fulfil in the future. Increase the expense payment period, enabling you to hold more inventory and long-term liabilities that do not significantly affect your working capital.
Another expense to watch out for is tax expenses. With the help of a tax accountant team, you can avoid double or even triple tax expenses. You can also use tax rebates and other incentives to save you from overpaying too much.
4. Analyze Your Clients
If you sell items on credit, you should be vigilant about the clients to whom you sell the products. Ensure they can keep their repayment schedules. The diligence will help you reduce issues like bad debts, which can affect your capital. Secondly, ensure they pay within the agreed duration.
Do a credit assessment on every client before you sign any long-term and capital-intensive partnership. The analysis will help you remain trustworthy, and the clients can pay all their dues on time as agreed. Credit analytics also allows you to determine the amount of goods you sell on credit.
Besides that, you should limit your credit-based sales. Ensure your customer can adopt various payment strategies, like pay before dispatch, on delivery, and other methods. Such a strategy will ensure customers only owe you a little.
5. Explore Different Payment and Financing Options
Major business expenditures are likely to boost your asset value but can affect the cash availability and, to some extent, raise your liability levels. Therefore, you should mind when and how you plan to finance major business investments and activities.
For example, building factories using equity or a loan rather than business capital would be better. These long-term payment methods save you from the short-term stress associated with the amount of capital you have. Such investments will likely generate capital to cover running operations and return all the investment capital, including loans.
You can also opt for long-term loans and investments from family and friends. These loans will save you from spending working capital on necessary needs like machine acquisition and expansion. If you have a bigger business, equity or a bank loan will help you avoid spending too much cash.
Conclusion
The ultimate way to manage your working capital ratio is to deploy strategies that help you increase your cash availability.
Consider expense management, increasing cash collection strategies, and strengthening and diversifying client payment methods. Remember to balance the asset cash with others to avoid holding too much cash while limiting asset acquisition.
