Every business in America needs a certain amount of working capital. Insufficient capital means not meeting immediate needs without establishing additional lines of credit. But even establishing additional credit may not help if a company’s cash needs cannot wait for as long as it takes to arrange new credit. In short, companies need to manage their working capital well.
We can play a role by offering companies account receivables factoring. Factoring account receivables involves selling unpaid invoices to a factoring company at a discount rate. Businesses get their hands on immediate cash rather than waiting on invoices that could take anywhere from 30 to 90 days to settle.
Working capital is so important that we have put together five ways to better manage it. There are more than just five, so we will follow this post up with the second one. Be sure to check back later to read it.
1. Be Circumspect About Extending Credit
Whether you run a business-to-business (B2B) or business-to-consumer (B2C) enterprise, at least some of your customers are likely to request credit. Extending credit is perfectly fine but be circumspect about it. Customers who do not pay their invoices on time will make it difficult for you to maintain your desired level of working capital.
2. Always Send Invoices Promptly
Your company can better manage its working capital by always sending invoices promptly. Another way to look at it is to shorten your company’s operating cycle. What is the operating cycle? It is the amount of time that passes between first starting work and eventually getting paid for it. Sending invoices promptly should reduce the operating cycle. A shorter operating cycle helps maintain stable cash flow.
3. Be Diligent About Receivables
Sending invoices promptly is just one half of the accounts receivable equation. The other half is collecting on those invoices. Your company can better manage working capital by being diligent in this regard. Do not let unpaid invoices go perpetually. Don’t let them go at all.
A well-known rule of thumb in business is that an invoice is less likely to be paid the longer it goes uncollected. For every day your accounts receivable department doesn’t collect outstanding invoices, you are increasing the chances that payment will never be received.
4. Be Diligent About Paying Your Bills
Your vendors are in the same position you are in. They need to maintain working capital as well. Therefore, they are counting on you to pay your invoices on time. Do not let them down. You will be doing yourself and them a favor by paying on time.
How does this help you better manage working capital? Paying invoices on time improves your reputation as a customer. Vendors will actually want to do business with you. As a result, they will be more willing to temporarily extend payment terms if you find yourself in a tough position. You might need that generosity every now and again.
5. Leverage Your Invoices
You might be doing everything right and still experience cash shortfalls from time to time. That takes us back to a point we made earlier in this post: taking advantage of account receivables factoring. When you are facing a cash crunch, leverage your invoices as the assets they are. Sell them to a factoring company to raise some quick cash.
There is a lot more to say about managing working capital. We will pick it up in our next post. Until then, remember that Thales Financial specializes in account receivables factoring. Let us know if we can help you maintain your targeted level of working capital.