Improving Working Capital Management
Strategies to Improve Working Capital Management
When discussing areas frequently overlooked by small businesses, working capital management is at or near the top of most lists. While the primary reason for this could simply be lack of time, it is more likely that small business owners are confused by what can appear to be a technical financial topic.
It is true that there can be complicated terminology associated with the various elements of working capital financing and management. But there are several critical aspects of working capital that depend more upon using common sense than specialized techniques.
Three practical strategies to improve working capital management are featured below.
- Reducing debt and operating expenses.
- Improving business communication and negotiation.
- Replacing banks with more effective lenders.
A Working Capital Definition
Reducing Business Debt and Operating Expenses
When a small business owner prepares to talk about working capital management, the discussion often focuses on financial strategies for increasing commercial loans such as a line of credit with their bank in order to offset reduced sales and inadequate short term cash flow. This is a natural response because for many years banks actively encouraged such thinking. However, the banking world took a sudden turn several years ago, and working capital loans to small businesses are no longer a top priority for them. Small business owners can especially see why we all need to be economists in this changing economy.
Even without a business bank turning their back on most forms of working capital financing, it is prudent that small business owners pursue business planning strategies to reduce their operating expenses and business debt levels. Just as reducing various kinds of government debt has become a featured topic in political discussions, the time is ripe for commercial borrowers to manage business debt reduction in their own backyard.
Improving Working Capital and the Bottom Line
Do You Need Help with Business Communication?
Business communicating improvements frequently translate to an improved bottom line, but the benefits of improving business communication are overlooked far too often. Whether this involves better communicating with banks or suppliers or customers, business communication strategies can produce timely and cost-saving results.
In many cases, communicating should be elevated to the more-specialized level of negotiating. For working capital management, there can be areas that simply need more effective business communicating while other issues will almost certainly require financial negotiating strategies.
Should I Fire My Banker?
A bank is the common element in all three financial strategies presented here for improving working capital management. If a small business owner has made an effort to reduce debt and operating expenses as well as negotiate and communicate with their banker and still has working capital problems, it is time to consider whether firing their banker will improve the situation.
Before reaching the point of firing your banker and bank, here are some other bank-related questions to explore:
- What if my bank says no?
- Which banks should be avoided?
- What are Zombie Banks?
- Is my bank a Zombie Bank?
- Should I fire my Zombie Bank?
- Should I consider commercial lenders that are not banks?
Anticipate Working Capital Risks and Problems
Here are several key points:
- Avoid "weak link" lenders. The recent banking crisis has made it crystal clear that there are more weak links among banks than most people realize.
- Risks: Manage, reduce, eliminate or avoid.
- Debt: Reduce business debt instead of increasing it. This might be the most important working capital management lesson of all.
- Current operating expenses: reduce by business negotiations and other strategies.
- Time management: Get expert help when needed.
- Warnings: Don't ignore them! The warnings about banks are among the most important that continue to be ignored.
- Costs: Pursue cost-effective solutions.
- Zombie Banks: A major component in understanding working capital difficulties.
Much to everyone's surprise, banks might be the problem rather than the solution when it comes to working capital financing for small businesses. In any case, banks have changed how they view small business loans of all kinds. It is only prudent for small business owners to anticipate the problems and risks associated with obtaining working capital from traditional banking institutions.
Asking the right questions is an important step toward working capital management success. Some of these questions are the following:
- Is working capital financing available?
- What are the problems and risks?
- What are my options?
- When should I fire my banker?
- What is my Plan B?
The need for effective risk management is a common theme in all of the above questions and points about working capital.
Risk comes from not knowing what you're doing.— Warren Buffett
Making Smart Working Capital Management Decisions
Working capital management involves making decisions at every turn.
A Problem with Making Smart Choices About Banking Alternatives?
Banks have been a source of problems for society for as long as banks have existed. That doesn't mean that we shouldn't worry about the problems or that the problems don't change over time. Over 200 years ago, Thomas Jefferson made banking one of his "special issues" for many years. It would be helpful if current politicians shared his concerns.
There are several different variations of banking quotes attributed to Thomas Jefferson primarily because he made so many public appearances and speeches on the subject of banks. In other words, he did not make the identical statement over and over again. He was genuinely concerned about the damage that he felt would be inflicted upon society by the banking institutions. Many of his different banking quotations include a variation of this observation: "I believe that banking institutions are more dangerous to our liberties than standing armies."
The fact that the financial establishment is so powerful helps to explain why banks were bailed out and the rest of society has been left to pay for banking mistakes and risks. Regardless of the recent bailout and the costs being shifted to taxpayers, there are still serious unresolved problems within the banking community.
Unless you don't have any dealings with banks, you should be aware of continuing bank risks. The problems are still out there.
It is our choices ... that show what we truly are, far more than our abilities.— J.K. Rowling
Zombie Business Problems Have an Impact in Most Businesses
© 2012 Stephen Bush