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December 06, 2018

These Tips Can Help You Stretch Your Working Capital

Amy Cortese

Journalist & Author, New York Times & other publications

Summary

Keep your working capital working harder by following these tips to help boost your cash flow.

Running a business requires a juggling act: Expenses must be paid even as you are waiting for checks to come in. That fluctuating pot of money at a business's disposal to pay for day-to-day expenses is called working capital.

“Working capital is basically the flow of cash that supports your operations," says Christine Rico, founder of CEO on Speed Dial, a financial consulting firm in Brooklyn, New York. “It's the lifeblood of a company."

These days, business owners may be feeling a working capital squeeze—just as they need it most to take advantage of a strong economy and the upcoming holiday season. “This time of year is so crucial," says Andrew Flamm, director of the Small Business Development Center (SBDC) at Pace University in New York. “If you don't have working capital in place to be able to ramp up and have goods on the shelf, you lose an opportunity."

Why the squeeze? Interest rates are inching up, making lines of credit and working capital loans more expensive. In addition, many businesses are on the receiving end of a push among large corporations to optimize their own cash flow by pushing out payment terms.

So how can businesses stretch the working capital they have? These tips can help:

Manage Your Cash Cycle

“The best business model is the one where you get paid right away," says Anthony Price, founder and CEO of LootScout, a small-business consulting firm in Middletown, Connecticut. He counsels business owners to understand their cash cycle—the time between when they provide a product or service and when they get paid—and take steps to shorten it. That includes invoicing promptly and sending reminders to make sure you get paid on time. Small businesses don't always have a lot of leverage with larger customers when it comes to payment terms. But consider offering an early payment discount to get cash in the door more quickly.

Trim Expenses

You've probably taken a hard look at your home budget—do you really need that extra cable channel you pay for every month but are not watching? Businesses have similar opportunities to cut fat without impacting their ability to thrive. Can you cut down on travel? Is there a less expensive shipper or supplier available? Do you really need that online subscription? Trimming unnecessary costs is one relatively easy way to boost your cash flow. In addition, some credit cards offer substantial discounts on necessities like office supplies and wireless phone service.

Get a Line of Credit

Don't get caught short when new business opportunities arise. “A line of credit can ensure you have cash on the sidelines waiting for you when these opportunities come about," says Flamm. Whether you need to upgrade your equipment, stock up on inventory or hire more staff to take advantage of a new contract, having credit in place—whether a business credit card, loan or line of credit—can make the difference, says Flamm. But advance planning is required. “Being able to address your line of credit issues when you are in a position of strength gives small businesses greater leverage and a greater range of options to look at."

Balance Inventory

“Think about inventory as a whole bunch of cash that's sitting there that you can't do anything with until it goes out the door as a product," says LootScout’s Price. Keep inventories as lean as possible; too much inventory ties up cash and cuts into profits. At the same time, you don't want to get caught short. A good forecasting practice will help you find the right balance, says Price. And try to negotiate favorable accounts payable terms with suppliers—if they'll agree to a 60-day payment term, grab it.

The best business model is the one where you get paid right away. 

–Anthony Price, founder and CEO of LootScout

Get Creative Around Revenue

The best way to increase your working capital is to increase sales. Does your pricing provide the profit margins you need to be sustainable? Are there new sources of revenue you can explore? Many businesses have found ways to create a premium tier of product or service, for example. Price recommends offering gift cards, especially around holidays. While it's a liability you'll have to eventually fulfill, it's a great way to build up cash in short term. Or, he suggests, think about creating special incentives for your best customers. “Be creative," urges Price. “That's an advantage small businesses have—they can make decisions relatively quickly."

Get a Handle on Your Numbers

Let's face it, finance isn't every business owner's strength—or cup of tea. But it pays to spend time understanding and analyzing your numbers. A regular review can help flag issues, such as an impending cash crunch, before they become problems. If you don't have a bookkeeper or accountant, Flamm suggests meeting with a small business advisor. There are SBDCs such as his in every state, he notes, and their services are free of charge. And consider investing in tools and technology that can help manage your finances.

Photo: Getty Images

The information contained herein is for generalized informational and educational purposes only and does not constitute investment, financial, tax, legal or other professional advice on any subject matter. THIS IS NOT A SUBSTITUTE FOR PROFESSIONAL BUSINESS ADVICE. Therefore, seek such advice in connection with any specific situation, as necessary. The views and opinions of third parties expressed herein represent the opinion of the author, speaker or participant (as the case may be) and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions. American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any such opinion, advice or statement made herein.

Running a business requires a juggling act: Expenses must be paid even as you are waiting for checks to come in. That fluctuating pot of money at a business's disposal to pay for day-to-day expenses is called working capital.

“Working capital is basically the flow of cash that supports your operations," says Christine Rico, founder of CEO on Speed Dial, a financial consulting firm in Brooklyn, New York. “It's the lifeblood of a company."

These days, business owners may be feeling a working capital squeeze—just as they need it most to take advantage of a strong economy and the upcoming holiday season. “This time of year is so crucial," says Andrew Flamm, director of the Small Business Development Center (SBDC) at Pace University in New York. “If you don't have working capital in place to be able to ramp up and have goods on the shelf, you lose an opportunity."

Why the squeeze? Interest rates are inching up, making lines of credit and working capital loans more expensive. In addition, many businesses are on the receiving end of a push among large corporations to optimize their own cash flow by pushing out payment terms.

So how can businesses stretch the working capital they have? These tips can help:

Manage Your Cash Cycle

“The best business model is the one where you get paid right away," says Anthony Price, founder and CEO of LootScout, a small-business consulting firm in Middletown, Connecticut. He counsels business owners to understand their cash cycle—the time between when they provide a product or service and when they get paid—and take steps to shorten it. That includes invoicing promptly and sending reminders to make sure you get paid on time. Small businesses don't always have a lot of leverage with larger customers when it comes to payment terms. But consider offering an early payment discount to get cash in the door more quickly.

Trim Expenses

You've probably taken a hard look at your home budget—do you really need that extra cable channel you pay for every month but are not watching? Businesses have similar opportunities to cut fat without impacting their ability to thrive. Can you cut down on travel? Is there a less expensive shipper or supplier available? Do you really need that online subscription? Trimming unnecessary costs is one relatively easy way to boost your cash flow. In addition, some credit cards offer substantial discounts on necessities like office supplies and wireless phone service.

Get a Line of Credit

Don't get caught short when new business opportunities arise. “A line of credit can ensure you have cash on the sidelines waiting for you when these opportunities come about," says Flamm. Whether you need to upgrade your equipment, stock up on inventory or hire more staff to take advantage of a new contract, having credit in place—whether a business credit card, loan or line of credit—can make the difference, says Flamm. But advance planning is required. “Being able to address your line of credit issues when you are in a position of strength gives small businesses greater leverage and a greater range of options to look at."

Balance Inventory

“Think about inventory as a whole bunch of cash that's sitting there that you can't do anything with until it goes out the door as a product," says LootScout’s Price. Keep inventories as lean as possible; too much inventory ties up cash and cuts into profits. At the same time, you don't want to get caught short. A good forecasting practice will help you find the right balance, says Price. And try to negotiate favorable accounts payable terms with suppliers—if they'll agree to a 60-day payment term, grab it.

The best business model is the one where you get paid right away. 

–Anthony Price, founder and CEO of LootScout

Get Creative Around Revenue

The best way to increase your working capital is to increase sales. Does your pricing provide the profit margins you need to be sustainable? Are there new sources of revenue you can explore? Many businesses have found ways to create a premium tier of product or service, for example. Price recommends offering gift cards, especially around holidays. While it's a liability you'll have to eventually fulfill, it's a great way to build up cash in short term. Or, he suggests, think about creating special incentives for your best customers. “Be creative," urges Price. “That's an advantage small businesses have—they can make decisions relatively quickly."

Get a Handle on Your Numbers

Let's face it, finance isn't every business owner's strength—or cup of tea. But it pays to spend time understanding and analyzing your numbers. A regular review can help flag issues, such as an impending cash crunch, before they become problems. If you don't have a bookkeeper or accountant, Flamm suggests meeting with a small business advisor. There are SBDCs such as his in every state, he notes, and their services are free of charge. And consider investing in tools and technology that can help manage your finances.

Photo: Getty Images

The information contained herein is for generalized informational and educational purposes only and does not constitute investment, financial, tax, legal or other professional advice on any subject matter. THIS IS NOT A SUBSTITUTE FOR PROFESSIONAL BUSINESS ADVICE. Therefore, seek such advice in connection with any specific situation, as necessary. The views and opinions of third parties expressed herein represent the opinion of the author, speaker or participant (as the case may be) and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions. American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any such opinion, advice or statement made herein.