Working capital is very important for a business. Without sufficient working capital, you can run into problems paying day-to-day expenses. However, too much working capital is also not desirable. But what exactly is working capital? And more importantly: how can you improve your working capital? We explain in this blog!
What is working capital?
There can be quite a bit of confusion about what working capital is and especially what it is not. This is because not all the money you own as a company falls under working capital. The budget with which you as a company pay your daily expenses is called working capital. Think of paying suppliers, paying salaries and buying stocks. With this, you can think of working capital as the company’s wallet. However, other payments, for example investments in the business, new machinery, company cars or inventory, are not financed from working capital.
What is healthy working capital?
To meet all daily expenses, a healthy working capital is very important for a business. When there is not enough working capital available, unpleasant financial problems can eventually arise for a business. Therefore, as a company, you need to ensure that enough working capital is reserved at all times. But can you actually have too much working capital? The answer: yes. Of course, it is always better to have too much than too little working capital, but too much working capital is far from desirable. As mentioned, working capital is only meant to pay for day-to-day expenses. So when you want to invest in the business, you do not do so from working capital. Therefore, a company’s excess working capital ultimately does not benefit the company at all. Often, excess working capital is money tied up in accounts receivable or (too ample) inventory. But if you have excess or deficit working capital, how can you improve your working capital?
How do you improve working capital?
Keeping your working capital well balanced is vital. But how can you improve your working capital as a business? We give you some tips:
Improve working capital by having the right inventory
If you are often left with large stocks, this has a negative effect on working capital. After all, as long as an item is not sold, its value remains locked up in the warehouse. It is therefore important to properly research the current market when buying stock. When you have the customer’s needs well in mind, you will be less likely to end up with too much stock full of unsold items.
Improve working capital when paying creditors
Creditors also play a role in improving working capital. There are a number of ways you can improve your working capital by paying creditors. For example, always try to make sure that you don’t pay all bills at once. If you can spread out the payment of bills, this will have a positive impact on working capital.
Moreover, with some creditors it is possible to pay the amount in instalments. This also has a positive effect on working capital. And do you have a relatively long payment period to pay your creditors? Then too, your working capital will improve, as you can keep the money inside for longer. However, always keep in mind that sooner or later the creditors will have to be paid at some point anyway.
Improve working capital with the invoicing process
Besides inventory and paying creditors, debtors play at least as big a role in working capital. When you want to improve your working capital, it is therefore smart to look at how you can encourage prompt payment on your side. How does the invoicing process actually run? What do the invoices look like, are they actually clear enough? And in the communication with the customer, are there things to improve there? When you have optimised your own invoicing process to perfection, you will see that future payments will be made faster. On the other hand: of course, the moment the customer pays your invoice is not entirely in your control. Do payments take a long time even after optimising the invoicing process? Then the problem is not on your side, but on the other side. At such a point, is there nothing more you can do on your side to receive the money from the relevant invoices and thus improve working capital? Yep, with factoring, for example.
Improving working capital with factoring
Do you increasingly find yourself waiting a long time for a customer to pay his or her invoice, putting your working capital at risk? In such a case, factoring offers the solution for your situation. But what is factoring and how does factoring actually work?
Factoring is an alternative financing method that is increasingly used among more and more entrepreneurs. Generally, every invoice sent has a payment term of 30 to 90 days. As a result, you as an entrepreneur may find yourself waiting for your money for a long time. With factoring, you completely avoid this problem. Factoring is all about selling invoices to a factor, after which the factor advances the corresponding amount. With Factris, you can expect your money in your account within 24 hours. This means you are no longer dependent on the customer’s payment terms, giving you new financial scope to put into working capital at very short notice. Moreover, after taking over the invoice, Factris takes care of the further financial settlement with the customer. As a result, you no longer have to worry about collecting the relevant amount from the customer.