Learn how to increase working capital in 6 strategic steps

Discover the main strategies to increase your company's working capital

How to increase working capital is one of the main challenges for entrepreneurs.

After all, we are talking about something essential for the financial health and growth of any business.

Due to its importance for companies, it is important to understand the best practices to increase and keep working capital under control and thus avoid possible financial problems in the short and long term.

With that in mind, we’re going to talk about everything on the subject and give you some tips to help you through this process. Keep reading to find out more.

What is working capital?

Working capital is the financial resources that the business has to cover its operating costs, that is, to maintain and guarantee the continuity of operations.

It includes amounts in cash, deposited in bank accounts and accounts receivable.

At the beginning of the venture, the working capital calculation is made to analyze how much is necessary to keep in cash and, thus, fulfill all the business obligations according to the planning carried out.

However, checking this indicator is something that should always be done, not just when the company is starting its activities.

Furthermore, working capital is not only concentrated in the company's cash, but also in highly liquid assets, that is, goods and rights that can be quickly converted into cash to pay short-term obligations.

What are the types?

There are different types of working capital.

Get to know each of them better:

• Net working capital: It is the balance of current assets minus current liabilities. This account includes assets that can be converted into cash quickly and used to maintain the company.

• Negative working capital: This is a warning sign, as it may indicate that the company is spending more than it is earning. If this result is long-term, the company's finances and progress may be further harmed. In this case, the available resources are not sufficient to pay off current debts.

• Own working capital: It is the company's available capital without the need to resort to loans or external investments. In this way, the company can use the financial resources it has acquired on its own.

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• Working capital associated with investments: This type refers to the money intended to cover expenses for investments that the business intends to make.

How to increase working capital?

Now that you know what working capital is, we will show you the main ways to increase it.

Check out the tips we have put together to help you better manage this situation:

1. Reduce expenses

Reducing companies is one of the main objectives of any business.

Unfortunately, it is not always easy to do this, as there are essential expenses that cannot be eliminated.

However, it's important to evaluate all your fixed and variable expenses. This way, you'll truly understand your business's cash flow and how you can increase it.

Here are some ways to reduce business costs without compromising growth and continuity of operations:

• Investigate all your costs

• Review the investments made

• Reevaluate your tax regime

• Use technology to your advantage to optimize costs

• Know how to negotiate with your suppliers

2. Monitor revenue

Revenue is what contributes to the company's equity growth.

There are two types of revenue: gross and net. Gross revenue is basically any inflow of financial resources that corresponds to the activities for which the business was established.

In other words, it comprises the total revenue.

Net revenue is the result of gross revenue minus returns, taxes, discounts and rebates. In addition, interest on financial investments (taking into account tax discounts) also makes up net revenue.

And it is essential for any entrepreneur to know how much financial resources the business is producing.

This way, it is possible to price products and services more clearly, which enables the creation of an objective and efficient sales plan.

With this information, you will be able to develop strategies that contribute to the company's profit, and thus increase working capital.

3. Cash flow control

Controlling cash flow is another essential point to optimize working capital.

Cash flow can be defined as the movement of money in and out of the business's cash register.

In other words, as this activity records financial movements, it can indicate whether expenses are greater than income.

To control cash flow more efficiently and accurately, it is important to record sales and expenses daily, record all transactions, manage your inventory, among others.

Furthermore, a good financial management system makes all the difference!

4. Create a financial plan

The lack of financial planning makes it difficult for many businesses to reduce their costs and think of strategies to increase profits.

But after all, what is this?

O financial planning, in fact, is the set of actions and tools that seek to manage and organize the financial resources of a business, with the aim of increasing results.

5. Advance payments to be received

A good way to increase cash on hand is to anticipate the receivables that the company has to receive.

Thus, the cash flow is supplemented.

6. Perform efficient financial management

To know how to increase working capital, you need to closely monitor your business's financial movements.

In other words, calculate the indexes frequently and always keep the reports updated.

Efficient financial management allows the company to have more clarity in time to analyze the finances and think about new business strategies.

Conclusion

Poor financial management can put the company's profits and even the continuity of operations at risk.

For this and other reasons, knowing how to increase working capital is essential for all entrepreneurs.

We hope this article has helped you understand the importance of this operational control tool and, of course, learn about the main strategies for optimizing working capital in your business.

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