A good working capital management is important for every business, be it small or large. In fact, this is what differentiates a business from the rest. When you manage the working capital needs of a business correctly, you keep the cash flow problems at bay and improve the business.
Thus, as a business owner, you should know how to plan the working capital requirements in order to sustain a healthy cash flow. Below are the five steps you can follow to create a great working capital plan-
Start By Evaluating Your Future Funding Requirements
The first tip is to create a good working capital plan is to evaluate how much short-term funds your business might need in the future. You might need short-term funds for paying payrolls, taxes, rents, utilities, etc.
However, the due date of making these payments may not be the same as the date of cash inflow from your clients or customers. Thus, it is necessary to conduct a forecast to know where you might need money, for example, fixing the affected parts of the business, or an expected crisis, etc.
Aside from short-term funds, you should also assess your long-term funding needs. You will be in a better position to deal with financial obligations.
Calculate The Working Capital
Even if your current working capital is enough to fulfill your business’s financial needs, it is good to calculate the future working capital. For this, you need to analyze different growth scenarios.
Consider the economic trends, industry, and competition in the market to know what reasonable growth opportunities you can expect. In addition, conduct shock analysis to do contingency planning in case of any financial disturbances. Also, assess the margins and additional expenses at the growth level.
Check If You Have Access To Enough Working Capital Sources
Check what funding sources are currently available to you that can be used as working capital. Whether it is cash, inventory, or short-term bank loans, carefully figure out if they are sufficient enough to fulfill the business goals.
If not, you can apply for a loan from a financial institution. It is a great alternative to traditional bank loans for small, medium, and large businesses. Or, you can consider diversifying the money with more than one institution to protect your business from losing credit.
Have A Look At Your Accounts Payable And Receivable
The way you manage your accounts payable and accounts receivable depicts your business’s efficiency. Accounts payable is the amount of money a company owes and is considered a liability. And, accounts receivable is the amount of money a company can collect; thus considered an asset.
You can use ACH (automated clearing house) to provide the customers with direct debit. It helps you ensure that the payments arrive on time. Apart from this, accept credit card payments; it will help improve the cash inflow.
It is equally crucial to keep an eye on accounts payable. You can use disbursement accounts to know which issued cheques will hit your account. ACH can also be used to make timely payments to the suppliers. This way, you can balance the cash inflow and outflow, increasing the working capital.
Update The Plan Regularly
Last but not least, test the working capital plan, and update it annually. Once you implement the plan, check the financial results monthly to improve the plan in time. Also, access the state of the economy and the availability of cash flow sources to you.
If your business is struggling to keep up with the working capital needs, you might be ready to take a loan from banks or other sources. But, you may face challenges raising funds with these traditional methods.
In this case, you can talk to a professional money lender who will offer affordable business loans on your terms. These loans are quick in monthly or weekly instalments as per your convenience. Thus, you can ensure a sufficient cash flow in your business.