What exactly is working capital? It’s a term used for measuring your company’s short-term financial standing and operational efficiency. In this article, we’ll discuss how to calculate your working capital, as well as strategies for keeping it at ideal levels. The goal is to improve financial stability for your company and possess enough cash to cover your expenses.

 

We’ve compiled these 5 steps to help you increase your working capital:

 

1.Evaluate Your Working Capital Ratio

There’s a simple formula you can use to determine your working capital ratio. Compare your current assets against your current liabilities. It seems obvious, but this ratio should be checked regularly to make sure your business is viable over short- and long-term periods. If the ratio is below 1, then you are considered to have “negative working capital.” If it is over 2, then you may have too much and it could be time to invest your excess finances. In general, it is agreed that a ratio somewhere between 1.2 and 2 is where you want to be.

 

2. Stay On Top of Invoicing

One of the most important ways to safeguard your current assets is to develop a strong Accounts Receivable invoicing system. Don’t let those who owe you money slip through the cracks and make sure your own payments are collected on time as well. Regularly sweep your database to identify delinquent payments and stay on top of your customers or other vendors paying for your products and services.

 

3. Take on Long-Term Debt

Any loan or financial obligation that lasts more than a year is considered “long-term debt.” Look for ways to spread out your payments over longer periods of time in order to increase working capital. Just remember that longer credit periods may come with higher interest rates. In general, the interest being spread out will mean it costs you more over time. Taking on long-term debt can be a good option for short-term operational efficiency. Just don’t extend your loans any longer than you need to, so that you are not paying too much in the long run.

 

4. Manage Overhead Costs

The less you spend to operate your business, the more money you’ll have on hand to cover the costs you do need. Perform a regular assessment of your company’s overhead costs. Analyze operating expenses and determine if costs like rent, indirect labor, professional fees or advertising are absolutely vital to your business. Look for ways to eliminate unnecessary costs and unproductive assets (employees, vehicles, buildings, equipment, etc.).

 

5. Review Pricing to Ensure Profitability

Whatever products or services you are selling, verify that you are charging enough to make it worthwhile. Find the ideal price points so that it is appealing to your customer, but also profitable for your business when the ideal amount of sales are made. If your price points are correct and your sales are steady, you will definitely improve your working capital.

 

Increasing your working capital can be helpful when applying for a small business loan. For more information on our loans or to set up a free consultation, contact Main Street Business Capital today.