Whether you are an emerging freelancer or an established small business, there are two words you should know: working capital.
Working capital, in accounting speak, is equal to the current assets of your business minus its current liabilities. Put another way, working capital measures your company's ability to generate cash quickly for its operating needs. But the formula above is also good to remember since it implies your company is in better health when it keeps debt financing at a reasonable level relative to the assets in the business.
Defining Current Assets and Liabilities
The most common types of current or short-term assets in a business are its cash, accounts receivable, and inventory. On the other hand, current or short-term liabilities typically are made up of the accounts payable in a business and any other debts or taxes that are due for payment within a 12-month time period.
The best business models are the ones that naturally generate free cash flow, which intuitively increase the cash balance and thus the working capital of your business. However, not all businesses easily generate cash, especially in their earlier stages of development.
While debt financing is always an alternative, even the most cash-strapped businesses can improve working capital without increasing debt in the following ways:
Pay Your Bills Slower (But Still On Time)
You can increase your working capital by simply paying the bills of your business a little slower. This is also called increasing your days payable outstanding. However, it is important that you still meet the payment deadlines. If you run into a short-term cash-crunch, always contact your vendors first if you want to request an extension of payment terms -- never just pay late as you may risk the credit quality and reputation of your company.
Collect From Your Customers Faster
Your customers will vary in terms of their willingness and ability to pay you. However, you can still improve your working capital by collecting more money up-front and making it as easy for your customers to pay you as possible.
For example, use initial deposits or retainer payments to accelerate cash collection. Also, provide your customers with electronic invoices that they can pay immediately via credit card. Finally, you can also provide discounts or incentives for paying an invoice by a certain date. Again, when trying to improve working capital efficiency, it's all about getting cash in the door, as quickly as possible (even if it's ultimately less cash than if you waited it out).
"Turn" Your Inventory Faster
Buying inventory for your business to resell costs money. If you store your inventory for long periods of time before it is sold to your customers, the odds are good you have the potential to improve your working capital through better inventory management.
For example, reconsider your pricing strategy -- a slightly lower price or an occasional "on-sale" promotion can potentially move inventory faster. If possible, you may also want to change up the types of inventory you offer to customers to keep product fresh and interesting. Finally, encourage customers to pre-order product so that you can instantly turn around purchased inventory to interested parties.
Use Software To Track Working Capital
A great way to track and manage payments, collections, and inventory is through small business accounting software such as QuickBooks or FreshBooks. You can precisely choose the date you wish to pay your vendor bills. You can request payments from customers via email or text links in real time and track whether and when your client has viewed the invoice. You can also track all of your inventory in and out by product, SKU, etc. Finally, you can produce reports that show how you are doing with working capital management over time.
DFS Partners can assist you and your business with improving working capital management, cash flow, and implementation of QuickBooks to help you measure your progress. Contact DFS Partners to learn more about these and other consulting, analytics, and marketing services it can help implement for your small business.
DFS Partners LLC is a Norwalk, Connecticut-based small business consulting company that provides independent consultative, analytical, and creative services and solutions needed by regional entrepreneurs, small businesses, and other professionals. Our expertise focuses on two primary verticals: business analytics and content marketing. DFS Partners can offer an incremental single-point solution to an immediate need or be a trusted and retained partner that helps serves different business needs through a client's development, whether it be a for-profit or non-profit entity.
DFS Partners utilizes this experience to provide a variety of business analytics services that help meet the needs of emerging businesses who may not have the budget, time, or desire to hire a full-time CFO, bookkeeper, or a high-priced management consulting company to help them find ways to improve their business. Whether it is a more wholistic evaluation of the business, or a deep dive into one aspect of it, DFS Partners can provide experiential insights and analysis that may make substantial improvements in the operations and profitability of your small business.
DFS Partners also provides small businesses with a one-stop shop for a variety of its content marketing needs over the business lifecycle, including writing, website design, social media management, and commercial and product photography. The leadership of DFS Partners has evaluated, written, and edited thousands of financial marketing and investor communications documents, presentations, newsletters, websites, and other materials over the decades dating back to the advent of the website. These content marketing services are rounded out by point solutions, such as SEO- and industry-customized website design, as well as 5-star rated commercial and product photography.
Contact DFS Partners to learn more about the consultative, analytical and marketing services provided to emerging freelancers, entrepreneurs, and small businesses. Your first consultation is free.