How to Improve Operating Working Capital
Article summary: Your operating working capital is how you make payroll, purchase supplies and handle your daily operations. With so much at stake, it’s no wonder companies like yours are always seeking to improve this number. There are several simple ways to do this. Learn what they are so you can find what works best for your business.
What is Operating Working Capital?
Operating working capital, also known as net working capital (NWC), is the difference between a company’s assets (what you own) and its liabilities ( what you owe). By knowing your operating working capital you can know whether or not you have a good business and if you will run into problems paying your bills.
What Are Some of the Ways To Improve Operating Working Capital?
Collect quicker from your clients. This is a lot easier than you may think. For starters, you do have more control over accounts receivable, if you know how to use them effectively.
One action you can take is to sit down with your team and have a brainstorming session about why clients are paying late. They are on the front lines and likely have valuable insight on what steps you can take to improve your accounts receivable turns. You might also want to talk to your clients and see if they have any suggestions.
Work with your suppliers. See if any of them would agree to give you longer terms to pay their bills. For example, you can offer to give them more business if they can extend credit to 90 days.
Shop around for the best prices and deals. Reduce what you are paying your suppliers buy shopping around for a better price. If you can pay less and reduce your expenses, this will leave more money in the company. In turn, this should help improve operating working capital.
Look into refinancing your long term debts. If so, you can reduce payments and give yourself more available cash.
Carry fewer inventories on hand to avoid having to pay for it in advance. It’s important not to overstock your inventory and to ensure that goods are not sitting around your warehouse, not making a profit. That’s a liability because it also ties up cash flow and inhibits your ability to take advantage of growth opportunities. This is the biggest reason why just in time inventory has been the biggest buzz word for the past 20 years.
Reevaluate your biggest expenses. For most businesses, this is usually payroll and taxes. Then, see what you can do to reduce them.
Talk to accountant. They often have a deeper understanding of your business because they work with your numbers all day long. More importantly, implement what your accountant recommends.
Consult with others in your own industry. This includes trade associations and even competitors. It may surprise you how much business owners are willing to give advice or share.
Get a line of credit from Financing Solutions (www.financingsolutionsnow.com) to use as a backup plan. Most businesses only experience cash short falls during certain times of the year. A line of credit is perfect for dealing with this situation.
Best of all, their LOC costs nothing to set up and you pay nothing until you use it. Plus the line only takes days to set up.