10+ Proven Ways to Improve Working Capital Management

When you talk about working capital, you're really talking about 3 things: accounts receivable, inventory, and accounts payable. Your accounts receivable and inventory are your business's assets, while the accounts payable are your business's liabilities. As a business owner, you want the golden ratio of 2:1—twice the assets as liabilities.^{[1]XResearch source} This gives your business the cash flow to weather low-income periods and unexpected expenses. But how can you get there? We've collected some tips and tricks you can use to improve how your business manages its working capital.

1

Collect accounts receivable as soon as possible.

Don't wait until the end of the month to send the first invoice. A responsible customer will pay an invoice when it's received—but just because a bill is due at the end of the month doesn't mean you need to wait until then to send the invoice. If you send it early, you might get paid early, which will increase your working capital.^{[2]XResearch source}
- For example, if you have all of your invoices due on the last week of the month, you might send them out the second week of the month. That means any early payments you get would count as working capital for that month. Otherwise, those payments might not count until next month.
- Sending invoices early can also lower the chances that your customers will make late payments. If your customers are having cash flow problems, they might prioritize early invoices. They might also go ahead and pay them while they have the money.
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2

Align cost outflows with customer payments.

Use this option if you have a long production process. If the product or service your business produces takes several months to complete, that can seriously deplete your working capital—especially if you're having to spend money in the meantime for production. Require a sizable down payment for your product or service, then regular payments throughout the production period. That way, when you're done, you'll already have most of the payment.^{[3]XResearch source}
- For example, you might require your customers to pay 30% upfront, then another 30% of the total cost when production reaches the halfway point. That means when you deliver the finished product, the customer only has to pay you the remaining 40%.

3

Reduce your inventory.

Avoid being overstocked with items that won't be quickly sold. Money spent on inventory that isn't quickly recovered can't be recirculated. Using in-time restocking and keeping a tighter hold on your inventory can keep this from happening.^{[4]XResearch source}
- Streamlining your inventory processes also reduces costs in other areas. For example, if you maintain a lower back-stock of items, you might be able to get away with a smaller storage area and fewer employees to manage it.
- This applies to supplies and other materials that you might not necessarily sell to customers as well. For example, even if you got a good deal, you're just tying up cash if you buy 1,000 reams of paper for a business that only uses about 100 sheets of paper a month.
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4

Sell underused equipment or property.

If something's just sitting there collecting dust, turn it into cash. Whether you've recently upgraded or simply switched to a different process and have equipment or supplies lying around that you're not using anymore, sell them to another individual or business. Use the cash as working capital for your business.^{[5]XResearch source}
- As a basic rule of thumb, if you haven't used something in a year, you're unlikely to use it in the future. If your business is seasonal, it's okay to sell something if you didn't use it this season or last.

5

Make a personal investment in your business.

Inject your own cash to increase your company's working capital. If you're having trouble getting to that ideal 2:1 ratio any other way and you've got the money to do it, you can always make an investment yourself.^{[6]XExpert SourceHelena Ronis
Business AdvisorExpert Interview. 23 January 2019.} That helps give your business a cushion and also makes you look better to other investors or lenders (if you happen to be looking for a loan).^{[7]XResearch source}
- Make sure you're keeping finances separate, especially if you have a sole proprietorship. It's worth drafting a contract that makes the terms of your investment clear.
- You can also seek investment from others, such as by selling stock in your business in exchange for cash. Then, put that cash in reserves to hold as an asset.
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6

Don't make payments before they're due.

Paying bills early reduces your business's working capital. Pay your bills on the day they are due to keep cash flow even. If you pay early, you cut the cycle short and decrease your working capital for that month.^{[8]XResearch source}
- If you have installment payments, pay them when they're due rather than making double payments or paying ahead.

7

Negotiate better terms for accounts payable.

Where you can't increase your assets, you can decrease your liabilities. Get out your contracts with your vendors or other companies you do business with and read through the terms. Is there anything you could change that would be better for your business? Contact the vendor and see what you can do.^{[9]XResearch source}
- For example, you might want to change the due date so that it works better with your business's cash flow. You might also change the frequency of payments if that would give you more working capital.
- This can be especially beneficial on accounts you've had for a while. A vendor might be willing to give you more favorable terms if you've been a good customer for a year or more.
- Don't be afraid to look to other suppliers as well and see if you can get a better deal. Your loyalty is only as valuable as the deal you're getting. If a vendor isn't rewarding your loyalty, there's nothing wrong with looking elsewhere.
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8

Reduce expenses for supplies and equipment.

Look for better prices on supplies and equipment you buy regularly. There may be supplies you need to keep your business going, but those costs aren't set in stone. You might be able to get better deals elsewhere, but you'll never know unless you check regularly.^{[10]XResearch source}
- Keep in mind that even though you might've found the best deal 6 months ago, someone else might be offering something better now.
- If you have a back-stock of supplies, stop ordering them for a while. This can happen with things like office supplies, where you get in the habit of placing the same order every month whether you need all of those things or not.

9

Refinance debts for better interest rates.

Go back to lenders after paying for 5-10 years. If you have assets funded under long-term loans, such as a mortgage on a piece of land or commercial real estate, refinancing can get you a better interest rate. Once you've been paying for a while, the bank will typically offer you better terms than you had originally. Plus, since you're financing less money, your payments will be lower.^{[11]XResearch source}
- For example, if you pay for 10 years on a 30-year loan, then refinance for another 30 years, you can bring down your interest and payment. Making a lower payment each month will increase your business's working capital.
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10

Use long-term loans to pay for equipment.

Finance large purchases instead of paying for cash. You might think it makes more sense to pay cash upfront for equipment, but that's only reducing your working capital. By making payments over the course of a year or longer, you have less cash flowing out of your business each month.^{[12]XResearch source}
- You might also consider refinancing equipment once you've paid on the loan for a while and built up some equity. That lowers your payments and brings in some more cash.

11

Optimize your tax breaks and incentives.

Work with an accountant to make sure you're not overpaying taxes. Tax laws change every year. As a business owner, you don't have the time to keep up with all of that—so hire someone who does. An accountant or tax advisor will make sure that you're taking advantage of all the breaks you can.^{[13]XResearch source}
- Accountants and tax advisors also keep abreast of short-term tax incentives that encourage business owners to grow their businesses. These incentives can save you money on various equipment and upgrades if you're well-positioned to take them, which can ultimately improve your working capital.
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Question
What's the best way to get more money for a business?
Helena Ronis
Business Advisor
Helena Ronis is Co-founder and CEO of AllFactors, a unified web analytics software to drive company's marketing and business growth. She has worked in product and marketing in the tech industry for over 8 years, and studied Digital Marketing & Analytics at the MIT Sloan School of Management Executive Program.
Helena Ronis
Business Advisor
Expert Answer
The easiest and fastest way to get an investment is to have the partners put in personal money.
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Tips

Hire a consultant to help! Someone with experience handling working capital management can look over your books and your inventory and pinpoint areas that could use improvement.^{[14]XResearch source}
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If your business has too much working capital, use the extra in ways that will increase your profits.^{[15]XResearch source}
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Build working capital into the metrics that you analyze when looking at your business's performance. That way, you can monitor how different business decisions affect your working capital.^{[16]XResearch source}
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