Capital is one of the vital aspects of the business that comes in the mind before starting a business. Obviously, without knowing how much you gonna invest in the business, you will not be able to commence the business. Suppose, you have started a business and you want to know the performance of your business, how will you know it? Of course, by keeping an eye on your business capital. Let me tell you that every start-up needs to have a strong eye on their working capital to make a smarter and financial decision in their business. Whether you’re an accounting firm or any other business, working capital gives you an idea of how your business is doing.
If in any case, your working capital is not strong then you might need tips to build strong working capital. Therefore, this article brings you some effective tips that you can follow to build strong working capital for your business.
But before you look at the tips, let’s start with the definition of…
What do you mean by working capital?
In very simple words, working capital highlights the difference between what your business makes and what your business owes. Suppose, if you more debts than having liquid assets (cash), it means you have negative working capital. You’re at loss!
To check your working capital, just follow the formula here:
Net Working Capital = Current Assets – Current Liabilities
Let’s now move further to read the tips.
Effective tips to maintain positive working capital for every start-up
✔️ Have a control over your expenses and debt payment
The very first tip you have to follow to make your control your working capital is to manage your expenses and debt payments. What you exactly need to maintain here is – your business expenses, keeping an eye on financial projections, and setting some spending limits to fewer priority items. Expenses can kill your business so you have to ensure that you do the right investment on the right items. Moreover, you have to limit your debts also and ensure that you pay on time. If you follow this tip then you’ll see yourself in a better position.
✔️ Offer discounts on payments and penalize late payments
Another tip to look at is the payments you get from your customers. If you want to run your business effectively then you have to ensure that you get payments on time. Not getting payments on time can impact your business and its performance in the future. Well, you can offer discounts to customers who pay you before or on time. This encourages customers to outsource your services for the entire year. Moreover, you should also penalize customers who pay late. You can do this by adding a late fee policy to your customer agreements.
✔️ Adopt accrual basis accounting
What it is, you ask? Simply putting, accrual accounting is a double-entry method of accounting where the number of debits must equal the number of credits. This method ensures one thing which is your net income always is in balance by ensuring assets = liabilities + equity.
This method helps you know the impact of business loans and other expenses occurred within the business. In fact, you also need to maintain an accounting checklist which should include the following:
- * Overall expenses
- – Accounts payable & receivables
- * Fixed assets
- – Accrued payroll
✔️ Take the help of a tax specialist
Tax is the most important concept for any business to understand. In fact, if your business is earning more than the tax limit then you’re liable to pay tax, right. Therefore, the tax strategy should be on the top of your list. Having a proper tax strategy helps you build strong working capital in the end. The advantage of hiring a tax specialist is that he helps you understand the proper tax rules and policies and also helps you fill the taxation form. The right amount of tax helps you build strong working capital.
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To sum up
It is significant to keep an eye on your capital to check the overall performance of your business. As a start-up, you may face difficulty in the beginning to manage your capital; there all the above-mentioned tips will surely help you build strong capital for your business. Moreover, you can also take the help of a professional who can help you manage your business effectively and efficiently.
You can also get in touch with Kayabooks’ professionals who will help solve your queries.