- remove_red_eye116 views
- comment0 comments
Running a startup is a difficult task. In fact, most small businesses fail within the first few years of their operations because they can’t manage their business finances properly. But managing your business finances is not rocket science. In fact, there are just a few key ingredients that you need to improve. And, the most important of them is working capital management. Managing working capital effectively of your business is essential if you want to improve your startup’s finances. So, let’s begin.
There’s a simple mantra. The lesser your working capital ratio, the better your business finances shall be. A working capital ratio is just your current assets divided by current liabilities. Businesses try their best to operate with as less working capital as possible. A good working capital ratio is considered to be somewhere around 1.5 to 2. However, the lesser your working capital, the riskier it is for your business. Therefore, running your business with lesser working capital is just a question of your risk appetite. For example, Amazon is famous for its negative working capital ratio!
Considering the contrasting working capital management strategies out on the web, the question basically becomes – what is right for your business model and what strategies from other business models can you use? And, that’s why I asked experts from several businesses what their preferred working capital management strategies were. Here’s what I found…
#1. Plan for the Future and Keep an Emergency Safety Fund
Kyle McCorkel, owner of Safe Home Offer shares that he always tries to ensure that he had around $100,000 in his bank for emergency purposes. In his line of work, it is pretty common that an unanticipated deal may come up. Although he tries to plan meticulously for future businesses, acquisitions, rehabs and refinances, a $100,000 emergency fund helps him flow through unanticipated businesses that may crop up at times.
Planning in a spreadsheet for future business operations and working capital requirement is key as according to him, he needs to keep track of capital needs at different times for each and every project. Overlaying them in a spreadsheet helps Kyle track multiple projects which are at different stages, ensuring that nothing gets away through the cracks!
#2. Process Transactions Faster
Scott Rubzin, the founder of Tiffany Property Investments LLC shares that he uses an electronic payables and receivables system so as to automate his Accounts Payables and Receivables cycle. According to him, this has improved his business’ cash efficiency and conversion cycles. In fact, he attributes automation to have saved 70% of Tiffany Property Investments’ cash expenses.
So, why does this strategy work? Well, according to Scott, this strategy helps him improve his payment terms, which are created in a manner so as to improve capital conservation, as well as increase cost savings. Having an automated electronic receivables system also helped him reduce manual processing time and has got his business a faster cash collection cycle. Scott isn’t just the only one who attests to the importance of an automated transaction processing system. Bao Tran, founder of PatentPC and Kunal Sawhney the CEO of Kalkine Group, also share that they conduct their payables and receivables transactions electronically. Everything’s getting automated starting from response management, all the way to financial planning. If your business isn’t automating its processes yet, it’s losing out.
#3. Track the Right KPIs for your Working Capital
Steven Walker, the CEO of Spylix shares the importance of using the right Key Performance Indicators to measure his business performance. He also uses benchmarks to compare his business finances with that of his competitors. In fact, with the help of continuous tracking, one can know when their working capital management strategy is losing effectiveness with regard to one’s competition. Steven shares that he is looking to change his working capital strategy soon. He plans to reduce inventory and boost the turnover rate for his inventory, thus, taking up a more aggressive working capital management strategy.
#4. Get Rid of Unnecessary Debts
Having debts is a good working capital strategy. However, having too many debts, and those that are unnecessary can strain your working capital management. Melissa Macalinao, Project Manager, and Operations Manager of The SEO Mama Agency shares that she reduces her debts and keeps an adequate amount of cash so as to ensure she can ride over any unforeseen business fluctuations. Having a ton of debt can prevent you from adapting to sudden changes in the business environment. Always remember that nothing is guaranteed for your business. Sudden problems such as trademark infringements can harm your business operation substantively. And, in such cases, if you are burdened with debt, you won’t be able to put up a legal fight, resulting in massive damage to your business and brand value. Also, taking up too much debt can cause you trouble with regard to your business compliances.
#5. Improve Your Business Liquidity
Your business liquidity is very much based upon that part of your working capital that you can convert to cash in the shortest possible time. This helps you adapt to changing business environments very fast. Of course, cash is the best option for improving your business liquidity.Yousun Allen, CEO at Yosun UV Printer stresses the importance of having access to adequate cash levels so that businesses can easily seize any and all opportunities that may arise as well as face-off unexpected hurdles. Plus, having more cash at hand helps you have more control over your business. You do not need to run your business as per the whims and fancies of banks and credit institutions who force you to fulfil contractual obligations despite having lucrative opportunities staring at you in the face!
Even if you are short on cash or want to follow a more aggressive working capital strategy by not having reserve cash, you can have a good degree of liquidity by maintaining working credit lines with banks or financial institutions. That way, if you’re ever in sudden need of cash, you can get cash quite fast without unnecessary hassle.
Wrapping it Up
As you can see, there are several ways of improving your working capital management. But it all depends on which group you fall in – an aggressive working capital manager or a conservative working capital strategizer. Either way, both these strategies have certain policies which either group can use, thus ensuring you have the best of both worlds. These 5 strategies are among those. So, which of these strategies are you going to start using? And, which ones do you already use? Let me know down in the comments!
About the Author
Adhip Ray is a startup consultant, the founder of a startup consultancy WinSavvy and an advisor at PatentPC. Although he hails from a finance and legal background with twin specializations on intellectual property rights and corporate law, he has been a marketing geek since 2015! He is also an author at HubSpot, Addicted2Success, StartupNation and several other business publications.