Cash flow is the lifeblood of any business. Controllers and chief financial officers (CFOs) play a strategic role in ensuring that this “blood” continues pumping through the company. What are some ways that financial leaders can improve the working capital for their company?

1. Automate Accounts Receivable

Bringing money in faster will ensure a steady supply of working capital throughout your business. Unfortunately, many accounts receivable (AR) processes rely on outdated methods such as paper invoices, manual data entry, and other time-intensive processes.

Automating your AR process will ensure that clients receive invoices promptly, that the information is accurate, and that you accept electronic payments with ease. As a result, you’ll be better able to receive cash inflows and save time among your financial team.

2. Offer Early Payment Discounts

Very often, a bird in the hand is worth two in the bush. That is, it’s better to have money today than tomorrow, at least as far as your working capital is concerned. 

Encourage your clients to pay promptly by offering discounts for early payments. For example, offer a 10% discount for clients who pay their invoice within a week of receipt. This will not only minimize the risk of late payments but also encourage a steady flow of cash into your business.

3. Strategize Your Payment Outflows

Does your company pay its bills at the same time each month? If so, it means that each month you’ll have a period where your working capital is significantly depleted as your suppliers and creditors cash their checks.

Instead, work out a payment schedule that more evenly distributes your payment outflows. For instance, you might pay your suppliers one week, your utilities the next, and so on. This doesn’t change the actual amount you pay, but it ensures that you maintain a steady amount of cash on hand.

4. Manage Your Inventory

One of the reasons businesses struggle with working capital is that their assets are wrapped up in excess inventory. But inventory is an illiquid asset that can’t easily be used to pay bills or seize a new business opportunity.

Using technology to optimize your inventory levels is crucial. The best software can identify cyclical/seasonal trends to ensure that your inventory is there when you need it while avoiding the danger of over-ordering, which can deplete your working capital.

5. Negotiate With Suppliers

One way to cut back on overhead expenses is to negotiate with your suppliers. You might ask about the possibility of a discount. Some vendors may offer discounts for volume purchases or for entering into certain types of payment plans.

Of course, if you can’t negotiate a better rate, feel free to look elsewhere. Diversifying your supplier network is always a good idea, and it may help you find better rates at a competing vendor.

6. Manage Your Debt

Loan repayments represent a fixed cost for your business. But these repayments include not just the principal but also the interest that accrues on your loan. And if you fail to pay on time, you can experience late fees and penalties that only deplete your resources further.

Making timely payments will prevent you from experiencing these financial penalties. But if you can work to eliminate debt altogether, you’ll have more working capital to allocate to other business priorities.

7. Focus on Sales and Marketing

Of course, the most direct way to bring in more working capital is to simply boost your revenue. Focusing on making more sales will ensure that you have a steady inflow of cash for your business.

Marketing helps. Crafting a strategic marketing campaign will help you connect with a broader target market, which can translate into more sales.

8. Narrow Your Customer Base

Depending on your industry, you may want to be more selective about your customer base. This may be particularly important for business-to-business (B2B) companies whose clients are fellow business owners.

Narrowing your customer base may sound counterintuitive. However, onboarding the wrong clients presents the risk of nonpayment, late payments, and other challenges that restrict cash flow.

9. Monitor Key Metrics

Keep an eye on your most important financial metrics, such as:

  • Working capital ratio
  • Collection ratio
  • Inventory ratio

These metrics will help you better understand how readily you bring in cash from your customers, and improving this speed will give you better access to working capital.

10. Get a Loan

If all else fails, you might consider taking on a working capital loan. Lenders can provide you with the cash flow you need to cover your operating costs until you can make other improvements to boost cash flow on your own.

Just be cautious. Any type of business loan will naturally add to your operating costs, and this can have a negative impact on your working capital in the future.

Use Working Capital to Reach Your Goals

As you can see, monitoring working capital isn’t just an administrative or accounting responsibility. By taking the right measures, you can ensure that your company has sufficient working capital to reach its strategic goals.