Managing your working capital is crucial to running a successful small business. However, with payroll, operating expenses, and general business overhead, many business owners find themselves stretched thin. There are a number of strategies a business can follow to best optimize their working capital.
Working capital, or in a broader sense net working capital, is defined as a firm’s current assets minus its current liabilities. Current assets include cash and cash equivalents, short-term investments, inventories, and accounts receivable. As for current liabilities, these include accounts payable, current portion of long-term debt, and unearned revenues. The net of the current assets and liabilities make up a business’ working capital. Managing accounts receivable is often the most important working capital strategy in the healthcare industry. Waiting on collections from government and private payers and patients can cause businesses to face a cash crunch. Whether you handle your billing internally or outsource to a third party biller, it is critical to make sure the invoices for your patient services are coded correctly and submitted in their entirety at the earliest possible moment. Any rejections or requests for further information from your third party payers should be addressed promptly. Lastly collecting money from patients brings its own challenges. Best practices include informing the patient at time of service of their liability and getting patient credit card or bank payment details upfront. Attempting to implement a quick receivables turnover timetable is very important to maximize receivables management; studies show that, if accounts receivable are not collected in less than 90 days, the chance of collection decreases dramatically.
On the liability side, business owners can improve their working capital situation as well. Maximizing use of your accounts payable can help business manage cash flow with less hassle. There are a number of ways to optimize your accounts payable including paying your suppliers at the latest possible date and asking for discount for early payment. On many invoices, a small percentage deduction can be applied if the payment is paid before 30 days. Known as a “Net 30” payment, many business owners pay these invoices at the last possible time (i.e., the 30th day), thereby incurring the savings at the optimal point in time. This concept of stretching payables allow owners more opportunity to collect on their accounts receivable, while still staying eligible for supplier discounts.
Concurrently, managing a firm’s inventory of medical supplies such as gloves, syringes, and other office equipment can prove to be a very effective tool for implementing successful working capital strategies. Particularly in the medical industry, inventory turnover can be quite fast; with the ever-changing landscape, business owners must update their inventory and make sure it does not get outdated. Outdated inventory is less likely to be used by your staff, and eventually must be written off by the firm, decreasing current assets and worsening the working capital burden. In order to effectively manage a company, the employer must educate his employees on the trade-offs of different scenarios, establishing overall goals and targets to meet to achieve long term goals. By maximizing supply chain management and insisting on a transparent environment throughout the process, firms will find that their working capital situation will, on average, substantially approve.
Lastly, it is important to note that, above all, cash is king in the working capital world. Keeping a healthy cash balance in the bank allows companies to expand as they see fit, as well as meet unforeseen obligations as they may arise. For some firms, taking on additional funding sources for working capital might be advised. An informed business owner must assess all options before taking on additional liabilities and weigh the pros and cons of traditional financing avenues and alternative lenders. All in all, a business must keep its finances in line if it expects to achieve profitability, and that starts with managing the day-to-day working capital needs.