The cash flow of your business says a lot about its financial health and stability. Calculating your working capital ratio may take time, but it will also show you a good representation of your current financial state. The total of your current assets minus your current liabilities will equal your net working capital. If your net working capital isn’t where it should be, applying for a working capital loan may be a good idea. If you want to increase working capital, you will need to avoid the following pitfalls.
Low or Negative Cash Flow
A business will begin to notice negative cash flow whenever its liabilities are more than the value of its assets. This will dramatically limit your ability to capitalize on new opportunities and may cost you by damaging your credit as well as your reputation. If you experience a negative cash flow for too long, it will eventually put you out of business and cost your employees their jobs. If you want to stay in business, you will need to bring your cash flow back into the positive range as soon as possible.
Financing Fixed Assets
Your company’s fixed assets are the items your business uses on a daily basis. This includes equipment, land, buildings, and vehicles. You may be able to sell them if you need money, but if you need them to do business, it’s easier to put them up as collateral for a loan. That’s an easy solution unless you find yourself financing everything your business owns. It’s important to keep at least a few of your items off of the financed list. Otherwise, you may be so in debt you won’t be able to get out.
Customers Aren’t Paying on Time? – Increase Working Capital
In today’s uncertain world, many customers are having trouble making payments on time. While it’s a good idea to extend some level of credit, don’t go in too deep. Put limits on the amount a person can buy on credit. The best option will always be to have your customers pay cash on delivery. This will keep your cash flow moving smoothly. You can still extend credit to customers who you know have a solid reputation for paying on time, but limit the amount of credit you offer to new customers.
Your Products and Services May Be Considered “Seasonal”
Many products and services may be considered seasonal or will sell better during specific times of the year. Snow removal companies won’t make much money in the heat of summer unless they offer landscaping and lawn care. If you offer seasonal goods and services, you may find yourself short of money during the off-season. You should try and plan ahead and save some money back for when your sales start to drop off. Applying for a working capital loan before you need it is the best way to stay ahead of the game when financial slowdowns start to affect your business. Having money available when you need it gives you peace of mind and also makes it so you don’t have to risk your company’s assets as collateral. The best way to increase working capital is by using sound business practices, but when you need a little help a loan can keep you moving forward.