Avoiding debt isn’t always possible as a business owner; however, properly managing your working capital can help mitigate risk and the need for debt. Working capital is necessary for funding, supporting, and growing your business. Although credit cards and lines of credit are affordable and viable options for short-term funding, learning how to avoid debt will help you secure financing when you have to borrow with a lender.
How Does Debt Happen?
Ideally, clients would pay as soon as services are rendered and the incoming cash (accounts receivable) would always outweigh the outgoing payments (accounts payable), but it doesn’t always work out that way. And growing your business—whether in products, services, or operations—comes with costs that tend to sneak up on you so how you manage your money beforehand matters a lot.
Here are four easy ways to manage your working capital.
- Assess
Look over your accounts payable and compare them to your accounts receivable. Look over your balance sheets and see where you can cut expenses and where you can increase sales. What products and services are working for your company and which ones are not? Make adjustments as needed. If you have a positive cash flow, start saving for that rainy day.
- Budget
Why you can’t plan for every possible hiccup and problem, you can make a space for them to safely land. Keep good bookkeeping records and use numbers from previous years and to predict future sales and expenses. Contemplate possible situations and think through all of the associated variables. And if all else fails, when doing your numbers, round up.
- Adjust Payment Terms
The sooner clients and customers pay, the better. Adjust your payment terms so that they’re clear, direct and include penalties for late payments. You can also offer incentives or discounts for clients who pay before the due date.
You can also negotiate better payment terms with your vendors. Negotiating discounts for early repayment or even changing your due date can help improve your cash flow. Every dollar and every twenty-four hours matters.
- Manage Inventory
Looking at your money on shelves in your warehouse does not help your bottom line. It will take some time to properly align inventory with demand, but it is well worth the effort. Inventory is costly and it may be worth the effort and money to have a third party manage inventory and shipping.
While keeping money within your business is essential, it’s more important to make sure that your money is working well for you and your company’s needs. Having accurate and up-to-date records will help you secure the best financing if you need it in the future.
Contact Hornet Capital Solutions to discuss your financing and budgeting needs.
