Working capital, or liquidity, is the total amount of cash you have in your business accounts. It covers everything from salaries and loans to various day-to-day bills. Financial experts recommend having about $1 to $1.20 in assets for every dollar of liabilities. This balance keeps your financial health in check and your mind at ease. An active dollar requires ongoing activity (like revenue from selling a product or service), and a passive dollar comes from income generated effortlessly (like rent income).
Keeping your cash flow healthy is crucial, especially in times of inflation. It helps reduce your borrowing costs by limiting the need for high-interest external financing and protects against currency depreciation. This allows you to maintain your purchasing power and stay agile enough to grab new opportunities and manage risks. SMEs face several challenges that can compromise their financial stability, like paying back government loans, late payments, unexpected expenses, and so on.
Doing more with less
Boosting your liquidity starts by streamlining your operations and maximizing the efficiency of your resources. This could mean cutting unnecessary expenses, renegotiating payment terms with your suppliers or automating some of your processes. Identifying areas where you can save money without compromising the quality of your offerings can help you free up more cash.
Tick-Tock: Chasing payments
Late payments are a big headache for SMEs, especially with rising prices and post-pandemic recovery. It may take longer for your clients to settle invoices, potentially causing issues with your cash flow. Minimizing risks means establishing clear credit policies and closely monitoring your accounts. Setting up late payment reminders can also keep your clients on schedule.
Tools to keep you on track
Plenty of tools out there can help you manage your cash flow (QuickBooks, Sage 50, Acomba, Wave, etc.). They track your money movements, forecast future cash flows and identify peak or trough periods in your industry. Some even offer advanced features like syncing with your accounting systems, managing sales forecasts and analyzing financial trends. Using these tools proactively lets you make smart choices to maintain a healthy cash flow, even in tough economic times.
Remember, optimizing your cash flow is key to getting through periods of inflation and ensuring your business not only survives but grows.
Streamlining your operations, managing payment delays, and utilizing the right software can help you safeguard your liquidity and keep your business secure no matter what comes your way.