Managing working capital is an essential skill for a business owner to posses. Without it, a business can quickly slip into a position of over spending prior to bringing in necessary income creating a cash flow problem that can be ruinous. This results in missed debt payments and high financing costs just the same as overspending at home can result in missed debt payments and high credit card bills. To better manage the working capital of your business, incorporate these methods proven to provide more streamlined business finance.
Budget for Debt Payments
Your business likely has a budget for most regular items such as payroll, rent, advertising and utilities costs. You may have a budget for a company picnic or other luxury expenses. Unfortunately, too few business owners recognize the importance of budgeting for a monthly debt payment. Even if you have a limit on your business lines of credit, and even if you maintain a low balance, you may find your monthly debt payments are too high given your income this month. Missing these payments can be detrimental. Do not let this happen by surprise. Budget for debt as a fixed expense. Assure it makes up no more than one third of your monthly income. For an individual, debt may be as high as one half of an income. However, an individual has a fixed salary, while a business is subject to more financial swings. Keeping debt payments under 30 percent of the anticipated income is a wiser plan.
Review Monthly Expenses and Income
Budgeting is one thing, but sticking to a budget is a whole different process. At the end of each month, a business owner must evaluate how well the plan worked. Was the total debt payment less than one third of the profit this month? Are the anticipated payments next month less than one third of the anticipated profit? It should be noted this may be slightly different for a business in the first three years of its existence. Taking on debt in high levels may have been necessary to open the doors, and it can be acceptable to have a slightly higher ratio of debt to profit. However, you still should monitor the progress monthly to ensure you are on the road to the ultimate goal of smaller debt payments in the future. Quarterly and annual revisions help assure a trend is being followed so you do not get too caught up in the month-to-month details.
Make Modest Projections
When you make projections for income in the coming year, you should have two sets of numbers. One set will be your financial goals, and this can be the figure you share with your sales team, employees or even investors. The fiscal goals can be aggressive, and there is little risk to setting these goals high. However, when it comes to budgeting your working capital, you should set the projections slightly lower to account for unforeseen problems. For example, if you are aiming for a $20,000 income next month, you may think taking on $6,000 in debt payments is safe. But, you may find a piece of equipment breaks or one of your employees quits. In this case, the $6,000 could be too much debt to reasonably allow you to make repairs or cover the cost of hiring a new employee. Adjust for the possibility a certain amount of profits are outside of your control, and budget for a $15,000 profit instead.
Secure Working Capital Loans
Having permanent financing in place can help you cover for the months when budgeting is not quite enough to cover your expenses. A delay in your accounts receivable or a slow month due to weather could cripple your business without a working capital loan. Overcome this problem by sourcing a business line of credit. Traditional lenders offer business lines in a similar manner to home equity lines. You can use the assets of your business as collateral. The revolving credit line is flexible enough to allow you to take more financing in months you need it and repay more debt in months you do not. Ultimately, as long as you budget for these payments with your other debts, you can maintain this loan in the long term with no severe penalties to your profit.