How to improve working capital – 3 ways to skyrocket growth

There are three core functions every CEO or business owner must pay attention to:

  • Bringing great talent to the team
  • Providing strategic directions
  • Maximizing working capital

No business can survive without a laser focus on these three operational aspects.

And when it comes to the money side, the truth is that no matter what your MRR is, you can make much more money by tweaking your operations.

While that’s easier said than done, boosting your working capital is still achievable. It’s not rocket science. Yet, you must make a determined, deliberate effort to understand your business fundamentals, plug revenue leaks, improve operational efficiency, and develop new growth centers.

Keep reading as we unpack those nuggets further with vital insights and practical tips to skyrocket your working capital in the next six months without seeking loans or external line of credit.

Before we dig into the good stuff, let’s clarify the basics:

What Is Working Capital?

Working capital is the cash you have to cater to everyday operations. It represents your company’s ability to satisfy its short-term financial needs. Maintaining adequate working capital is critical for companies to meet their obligations, like payroll, inventory, and other overhead costs.

To calculate your working capital, you deduct current liabilities from current assets.

Maintaining a positive working capital, where your assets outweigh your liabilities, is essential to the survival of any business, especially in times like these. In the subsequent section, we dive deep into actionable ideas to help you supercharge your working capital and scale your venture.

How to go about increasing working capital

 

Number One: Understand Your Business Fundamentals

The foundational principle of business development is ensuring you can grasp how idle interest translates to cash. Because how you make your money is more important than how much money you make.

You know it. I know it: the market wins.

You can have the best technology, infrastructure, or office space. And all that will mean little unless and until you have a system for converting idle interest into fulfilled orders.

In the immortal words of MIT’s Bill Aulet, the single necessary and sufficient condition for a business is a paying customer. Hence, the first step to maximizing your working capital is to deconstruct the various building blocks of your operation.

What does your inventory system look like?

Everyone knows that inventory attracts a high cost. Any unsold stock in the warehouse is idle cash that could’ve been working on multiplying itself. Yet, understocking your warehouse could also translate to unfilled orders.

Work with inventory management systems that help you plan stocks according to demands to free up cash for other business needs. And if you sell digital goods, ensure you can readily meet customer orders hassle-free.

Next, what is the working capital cycle like?

The number of days needed to convert your assets and liabilities into cash helps you plan your cash flow adequately to avoid financial strains.

That includes:

  • Being practical about payment terms for money owed on goods and services.
  • Managing receivables and payables to ensure a healthy bank balance.
  • Working with suppliers to obtain a profitable billing structure.
  • Using inventory data to forecast sales and plan spending.

And, of course, your payment collection strategy is crucial to ensuring effective order processing. Even if you sell in-store, you should have an online payment system that streamlines receivables and makes accounting faster. Plus, your payment system should have options for payment retry and revenue recovery, especially if you’re a software provider. SaaS companies often see high involuntary customer churn due to failed subscription payments.

It’s equally vital to ensure your processor can guarantee faster accounts payout and reconciliation to avoid locking up your cash.

Number Two: Plug Revenue Leaks with Absolute Operational Efficiency

Did you know:

  • Industry records show that 42% of businesses encounter staggering revenue leakage.
  • Businesses lose at least 9% of their annual revenue to revenue leakage, with chargebacks taking 0.47% of a merchant’s revenue each year.

Chargebacks occur when cardholders dispute a transaction to their bank for unauthorized transactions, order delivery issues, canceled recurring billing, or merchandise differing from the seller’s description. However, many con artists now misuse chargebacks to commit fraud. PayPal says businesses using their platform lose $4.5 million annually due to fraudulent online transactions, and friendly fraud – an abuse of the chargebacks system – represents at least 70% of all transaction frauds.

Chargebacks are a growing sustainability threat to businesses of all sizes due to fees, penalties, and eventual loss of processing privileges. And all available data on the subject indicates the risk isn’t going down.

To plug that significant revenue leakage:

  • Educate your staff and buyers on fraud patterns;
  • Ensure your product descriptions aren’t letting you down;
  • Ship physical goods with tracking to reduce buyer’s remorse;
  • Use anti-fraud tools to protect your website and thwart fraud attempts;
  • Be available and responsive to your customers, and address issues quickly.

Above all, automate your chargebacks so that when scammers force their way with meritless disputes, you can automatically pull evidence from over 50 data points and recover the revenue without lifting a finger.

While some fellows will tell you that chargeback is a cost of doing business, we know from factual data that’s untrue. Chargeback cost far outweighs the transaction cost due to ancillary and overhead expenses. For every $1 charged back, research shows that merchants lose close to $4!

That’s like flushing your working capital down the pipe.

Again, bookkeeping errors can also cost your business a shortage of working capital. For example, your discounting workflows could be the culprit for the lack of working capital. In that case, creating a single-use coupon system will be more profitable as it helps you better track coupons issued and those already redeemed.

If accounting isn’t your cup of tea, we recommend you hire a CFO immediately.

Note that your sales rep and customer relationship managers are your linebackers in ensuring constant working capital. Equip them with tools for optimal productivity.

Number Three: Develop New Growth Centers

Remember the classic line from so many movies, just before two people team up to achieve something bigger: “You’re gonna need a partner.”

Now that you’ve fine-tuned your fundamentals and plugged the revenue leaks into your company, I say to you the same thing: you need a partner.

Whether it’s bookkeeping, payment processing, promotion, or order fulfillment, developing strategic partnerships helps you create new growth opportunities and do more with less. For a mutually beneficial partnership, think of what you have the other party needs and what you can offer in return.

Another crucial step you can take in skyrocketing your working capital is to solve for adjacent verticals. For example, Chargeflow.io focuses on helping merchants recover false chargebacks. By listening to its customers, the company is now extending its services to include plugging different kinds of fraud loopholes as well – and was recently named the number one app on Shopify for fraud prevention in 2023.

Listen to your customer complaints and pain points.

As Peter Reinhardt, co-founder and CEO of Segment, a company recently acquired by Twilio for $3.2 billion, found after thousands of codes, the real cash cow for your business might not be the product or service you currently offer. “Being dismissive of users and having your clear vision of the future that isn’t necessarily solving a problem for your customers is a stunning failure on our part, and it’s a key thing that founders do again and again,” Peter says.

So there you have it.

These ideas, understanding your business fundamentals, plugging revenue leaks with absolute operational efficiency, and developing new growth centers, will help you skyrocket your working capital if you implement them thoughtfully. All the best!

About the Author:

Tom-Chris Emewulu is Chargeflow‘s Digital Evangelist. With 8+ years of digital marketing experience, he crafts high-intent, high-converting, data-driven SEO articles that put brands on page 1 of Google search. Forbes, DW, Business Insider, Businessss2Community, and many other publications have featured his works. You can find him on Social Media via @tomchrisemewulu.

Adriaan

Adriaan

Acquisition Investors for
Small Businesses

We’re capital partners for entrepreneurs acquiring cool things.
Search funds, minority stake exits, and SBA deals. Let’s chat.

Scroll to Top