5 Strategies to Boost Working Capital

Managing working capital isn’t just about crunching numbers; it’s about keeping your business alive and thriving. Whether you’re a sole proprietor or running a mid-sized operation, understanding your working capital is crucial to making informed, timely decisions that impact your everyday operations. And don’t worry, this isn’t just theory. We’re breaking it down into five practical strategies you can use. Before diving in, here’s a quick refresher: Working capital is the difference between your current assets and current liabilities. It indicates whether you have sufficient short-term resources to maintain smooth operations.

A healthy working capital gives your business the breathing room to handle slow-paying customers sudden expenses, pay suppliers, and not miss out on growth opportunities.

Let’s walk through five tried-and-true strategies to boost your capital and keep your business on solid financial footing.

Improve Your Invoicing Process

Late payments are a significant drain on cash flow. If you’re regularly chasing clients down or waiting for months to get paid, your working capital is going to suffer.

What you can do:

Send invoices immediately after delivering goods or services.
Set clear payment terms (e.g., Net 15 days or Net 30 days).
Consider early payment discounts. For example, offer a 2% discount if the invoice is paid within 10 days.
Utilize automated invoicing software to streamline follow-up processes.
Faster collections directly improve your working capital ratio. Even shaving off a few days in receivables can free up thousands of dollars each year for a small business.

Control Inventory Levels

Holding too much inventory is like leaving money sitting on a shelf. It ties up your cash and can lead to losses and wastage if products become obsolete or expire.

Try this approach:

Utilize inventory management software to monitor stock levels in real-time.
Forecast demand based on historical data and market trends.
Implement a “just-in-time” system where possible.
Regularly review slow-moving stock and clear it out at a discount as the product nears expiration.

Canadian small businesses, particularly retailers and manufacturers, often underestimate the amount of working capital tied up in inventory. Overstocking can increase wastage, while understocking can result in missed sales. A leaner inventory approach can increase liquidity without harming sales.

Extend Payables Strategically

It’s tempting to pay bills as soon as they arrive to avoid late fees, but immediate payments can strain your cash flow. Instead, aim to make full use of your supplier’s payment terms without damaging your relationship.

Steps to consider:

Negotiate longer payment terms, especially with long-time vendors.
Set payment reminders to ensure you never miss a deadline, but avoid paying early as well.
Avoid taking on unnecessary short-term liabilities, such as quick-turnaround loans, unless absolutely necessary.

Using the full term of your payables wisely keeps cash in your business longer, which can help offset timing gaps between receivables and payables —key to maintaining healthy working capital.

Monitor Your Working Capital Ratio Regularly

You can’t improve what you don’t measure. Keeping a regular eye on your working capital ratio (current assets ÷ current liabilities) helps you catch issues before they become emergencies.

Benchmarks to keep in mind:

A ratio between 1.2 and 2.0 is typically considered healthy.
Anything below 1.0 means you’re operating with negative working capital, which can be a serious red flag.

Use this ratio as a pulse check. If it dips, you’ll know it’s time to act, whether by collecting invoices faster, reducing expenses, revisiting your pricing, or taking a short-term credit.

Please note that your working capital will increase as your business expands. It is always helpful to keep some extra cash on hand if you plan to expand.

Secure the Right Type of Financing

Not all debt is bad, especially if it helps improve your working capital. The key is choosing the right financing tool for your needs.

Consider:

A capital loan to bridge the gaps between payables and receivables.
A line of credit to manage seasonal cash flow fluctuations.
Invoice factoring or financing to get cash upfront on outstanding invoices.

Optimizing working capital often involves using external financing options that align with your cash flow cycle and do not disrupt it. But be cautious: taking on high-interest loans or overleveraging your business can backfire quickly.

These are practical strategies you can start applying to equip yourself better to manage your short-term needs and prepare for long-term growth. While you can manage working capital effectively when your business is small, you may need professional help as it expands, and so can its transactions.

Contact Black and Gill LLP in Toronto to Strengthen Your Working Capital Strategy

Talk to a professional accountant to help you gather the financial data and insights needed to build a stronger working capital plan. At Black and Gill LLP, our accountants provide services that include cash flow forecasting, expense tracking, and receivables management. To learn more about how Black and Gill LLP can provide you with the best accounting expertise, contact us online or call us at 416-477-7681 to learn more about how we can help you and your business.