Small businesses are largely vulnerable to the availability of their working capital. Many owners focus on startup costs required to get their businesses up and running, neglecting to account for the extra cash required to continue growing an organization in the first few years. Additional capital is required to expand into new markets and support product development. Failure to accurately anticipate financial demand can cause a small business to crash and burn. Operations who have been established for a few years have more insight when it comes to predicting fluid asset requirements while new businesses are often forced to rely on detailed projections based on industry standards. Fortunately, simple steps can improve your cash flow without requiring major sacrifice.
Minimize Stored Inventory
Once an organization determines the working capital required both to maintain and grow their business, they also need to determine how they will acquire those finances. Businesses can take simple steps to improve available cash flow and decrease non-fluid assets. Inventory is a good place to start; stockpiling products and supplies hurts liquidity. By shifting to a “just-in-time” inventory model, supplies and new products arrive only when you need them. While companies may experience temporary disruptions in supply line that can decrease profit, overall this model allows more resources to be shifted to other areas of business. To minimize the negative impacts of using a just-in-time model, have backup plans to call on when demand supersedes supply.
Assess Invoice Schedules
If you are already using a modified inventory model, changes to accounting can streamline cash flow and improve working capital. Evaluate your payment policies, transaction methods and turnaround for sending out invoices. Improvements such as decreasing a 60 day payment window to 30 days will return cash more quickly to your organization. If you only accept checks, consider modifying your transaction procedures to include online payments. If you balance your accounts payable once a month, try staggering these payments and negotiating more favorable terms with vendors.
One of the biggest mistakes that small businesses make when they are getting started is isolating their forecasting to only include startup costs and first year projections. Successful planning looks beyond a year and will account for expenses that might occur over the next few years. Franchises should consider their equipment and how upgrades requirements will affect their capital demands. For seasonal operations, adjusting for slower periods will help prevent any surprises down the road.
Many business owners get overwhelmed once they realize the actual working capital required for building their organization. The good news is that these simple adjustments can increase your liquid assets and cut down on operational costs without requiring loans or sacrificing the profitability of your company.