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How do I Increase Working Capital?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 January 2020
  • Copyright Protected:
    2003-2020
    Conjecture Corporation
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Just about every business is interested in finding ways to increase working capital. Some solutions are relatively obvious, while others may require a little more thought and planning. There are actually four main approaches to effectively increasing your working capital and financing situation, with each general approach offering some potential advantages and a few possible liabilities.

The single most obvious way to increase working capital is to increase the amount of net profit generated by your business. There are several ways to go about this strategy. One idea is to look closely at the current expenses and identify areas where they can be reduced, without having an adverse effect on efficiency or the quality of the products offered. Another approach is to develop a strategy that generates additional sales without greatly increasing the current operating expenses.

Some businesses may find it helpful to eliminate product lines that require a fair amount of expense to maintain, but provide little in the way of return. If you do consider discontinuing a product, look closely at who is buying it. Should you find that a client who buys a significant amount of other products also purchases this less profitable one regularly, find out how important that product actually is to your customer, and see if another more profitable product would satisfy them as well. Otherwise, your client may seriously consider a competitor that can meet all his or her needs.

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A second way to increase working capital is selling off assets that are doing little to nothing for the core operation. This sometimes means looking very closely at how you currently do business. It is very possible that there is at least some duplication in equipment that is more for convenience than any other reason. Convert those assets into cash that can be invested and allow the profits from those investments to be used as working capital.

While this suggestion may or may not be practical, it is possible for owners to increase working capital by investing a little more cash into the business. Doing so may help to ease cash flow issues and position the business to make more profits. If that is the case, then the additional investment will pay off in a big way for the owner in the long run.

Reworking current debt is also a sound strategy if you want to increase working capital. Often, the process calls for converting short term debts into long term debts. When done with care and precision, this approach can help increase your cash flow, which in turn has a positive effect on the company’s ability to engage in the most efficient working capital management. For flexibility, consider obtaining a working capital line of credit, retire some short term debts, and then pay off the balance on the credit line with monthly payments that are lower than the payments on the original debt. Assuming that the rate of interest applied to the balance on the credit line is lower, this approach not only increases cash flow from month to month, but also saves the company money in the long run.

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