Profit and Loss Statement: How to Make it Working Capital – From A to Z
A profit and loss statement is sometimes known as an income statement, or as a statement of operations. It’s a financial report that shows a summary of a company’s revenues, expenses, and profits/losses, over a given period of time. The profit and loss statement shows a company’s ability to generate sales, manage expenses, and create profits.
Working capital is the difference between a company’s current assets; such as cash, customers' unpaid bills and inventories, and its current liabilities; such as accounts payable. Working capital is a measure of a company’s liquidity, operational efficiency, and short-term financial health. If a company has positive working capital, then it has the potential to invest and grow. If a company has negative working capital, then it may struggle to pay debts, and even go bankrupt.
Increase Working Capital and Liquidity
Working capital allows a business to meet its financial obligations, and sends out the message that the business has sound management. People who want a healthy profit and loss statement could start by examining their current financial situation. They may ask themselves questions such as;
- Can I improve my business model to minimize unnecessary expenses and delays in payments?
- Is there an alternative approach that would require less working capital, without hurting sales revenue?
- Is there a way I can use my assets to generate further funds?
Let’s look at a few common practices that have offered a nice cash boost, or simply reduced cash waste, for many business owners.
1. Don’t wait until the end of the month
Some business owners start collecting payments from their customers faster, as a way to keep more working capital. An operating cycle begins the moment you start spending money on a project, and ends as soon as you receive payment. To keep customers happy, it can be good to maintain a healthy rapport. However, this doesn’t mean that business owners have to wait until the end of the month to collect payments. If you wish, you can find out the normal time for generating an invoice in your industry, and try to minimize your operating cycle.
2. Borrow to increase working capital
Some business owners, who have a clear business plan, realize the importance of investing. In this case, taking on long term debt to create more working capital, can allow for more inventory to be acquired, for more ambitious marketing strategies, or for site growth and expansion.
3. Refinance fixed assets
Some entrepreneurs refinance fixed assets, such as equipment, in order to generate working capital. Equipment can either be leased to other companies, or it can be sold, for a one-time cash boost. Even unused office space can be leased out. This is a way to leverage assets and turn them into cash that may be needed for the expansion of the business.
4. Make a personal investment
Business owners with personal money put aside, sometimes make personal investments, in order to increase working capital. In this case, it can be helpful to do a cost/benefit analysis, to see what return you would get on your investment. If the payoff in the business outweighs personal losses incurred, then business owners may see this as a viable option.
5. Get external advice
It’s not always easy for entrepreneurs to see how they could increase their working capital. Many business owners use an external consultant to help them out. Consultants can help business owners look at key areas such as sales cycles, inventory turnover, and credit terms for suppliers and customers. A consultant could find where there are areas for improvement, and find ways to generate more cash.
6. Thorough credit checks on customers
Many business owners carry out credit checks on clients before signing deals. This is to ensure that the client will be able to pay their bills. They may also consider lower credit limits for new customers.
7. Collect outstanding invoices
Many business owners, who want to stay on top of their profit and loss statement, closely monitor all of their accounts. If payments are delayed beyond the accepted time frame, inquiries can be sent out. Reminders can also help to speed up the collection process.
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8. Limit unnecessary expenses
If business owners want to achieve transparency and clarity when it comes to how much they are spending, they can examine their budget and break it down. Some business owners set rules to restrict unnecessary spending. This can include restricting office and business trip expenses. This money can then fuel working capital.
9. Increase sales revenue
This may seem obvious, but more sales revenue generally means more working capital. Some business owners focus on expanding their sales force, or on creating new marketing channels. If profits won’t arrive in time to pay the bills, business owners can also work on decreasing costs.
10. Avoid stockpiling
Every unsold item is essentially a pile of money sitting on the shelf, not being put to use. This decreases liquidity and can make a business less agile and less competitive. Business owners who found ways to time their supplies and products, so they arrived exactly when they needed them, ensured a healthy cash flow.
11. Leverage your accounts payable
A lot of entrepreneurs realize the importance of keeping a good credit score. If at some point they experience cash flow problems, a good credit score and positive relationships can help them to extend payment terms. If they have cash flow problems, they can collect accounts receivable as quickly as possible, and delay accounts payable for as long as possible.
Keep Your Business Running Smoothly
If you run a business, you know that sustaining self-financing for a long time can be very difficult. Working capital is needed to keep businesses running smoothly and to allow for business growth.
Whilst you’re thinking about working capital, you should take a moment to review your other financials and investments. When your business is eating up so much of your time, it’s easy to keep track of other sources of income. If you’re looking for new ways to generate income for your business, check out this list of passive income ideas.