Tips to Improve Your Working Capital

Before I get to a working capital survival strategy, let me explain what working capital is for those who don’t know. It is the money a business needs to cover the gap between paying bills for its manufacturing or product purchases and collecting money from the sales of those products.

This can pose a problem. Why? Let's say the manufacturer of your parts makes your products and gives you a 30-day invoice which means you have to pay them in 30 days.

Then you have to pay your assembly workers to put a label on it, and pack it into a box for shipping. Your company has to pay them their salary in addition to payroll taxes bi-weekly. You also have to buy a label from a printing company. It’s a small expense but has to be paid up front until you can establish a credit relationship with them to get 30-day terms.

All of that must be paid in 30 days or less. You ship your boxes to your customer and invoice them. They have 60 days to pay you and you find that they often stretch that out to 90 days and sometimes even 120 days.

So you have to finance all that money for 60, 90 or 120 days. That's your working capital.

Here are some tips to help you cover your working capital needs:

• Pay your vendors as late as you possibly can without risking your relationship with them. Many will work with you if you inform them ahead of time that you’re a startup and you expect many more orders in the future. If you have to, pay a higher per piece price to get longer terms..
• Get the earliest possible terms you can get from your customers. Since cash flow is so important for a small or startup company, you are in some cases better off to lower your price or offer a discount to get paid with 30 days or less terms.
• As you grow, invest in a good accounts receivable collections person to stay on top of the money your customers owe you. Even ten days can make a difference.
• Explore using a Factor. This is a finance company that will pay you 50% - 80% of your invoice value the day it ships. They'll also collect the receivables for you. I wrote about this in more detail: How Factoring Can Help You to Bootstrap Your Company.
• Initially, you will probably have to invest some money to cover expenses. If you don’t have enough savings, you can do a small friends and family money raise or try to borrow a line of credit from your bank. For more tips on increasing your cash flow, you can read my article:?Why Cash is King, and How to Get More of It.
• Most importantly, do a good cash flow projection so you know when you have to pay everything, when you are going to run out of cash, and exactly how much working capital you’ll need. This will help you arrange your terms both on the vendor side and on the customer side. A good software program can be very helpful like Quickbooks. But an Excel spreadsheet can work fine until your business gets more complex.

Lastly, remember that you need to hoard your working capital. DO NOT spend it on long-term fixed assets, like real estate. If you want to buy or invest in fixed assets get a long-term loan. You need working capital to run your company and to grow.