Working capital improvement checklist for small businesses

Measure before you change anything

Working capital is current assets minus current liabilities. It is a snapshot, so a single figure tells you little. Pull your balance sheet for the last four to six month-ends and note the trend in cash, customer balances, inventory, supplier balances and short-term debt. Falling working capital with rising sales is a common pattern in a growing business, and it is the pattern this checklist is built for.

Record the starting point in writing. If you later tighten collections or renegotiate supplier terms, you will want to know which change actually moved the number. If your books are behind or your reconciliations are not current, fix that first, because every step below depends on balances you can trust.

Speed up what customers owe you

Start with an aging report listing unpaid invoices by how long they have been outstanding. Sort by amount, not by age alone: one large invoice that is 45 days old usually matters more than five small ones at 70 days. Contact the largest balances first and ask for a payment date, not just an apology.

Then look at the process behind the delay. Invoices sent weeks after the work, missing purchase order numbers and unclear terms are the usual causes. Send invoices the day the work is delivered, state the due date on the invoice, and decide in advance when a late reminder goes out and who sends it. Be careful with early-payment discounts: a discount that sounds small can be expensive when it is expressed as a yearly cost of money, so work it out before you offer one.

If a customer is unlikely to pay, talk to your bookkeeper or accountant about how to record it. Do not leave a doubtful balance sitting in receivables because it makes the balance sheet look healthier than the cash position really is.

Review what you owe and what you hold

List supplier terms next to the dates you actually pay. Paying every bill the day it arrives gives away free financing, while paying late damages relationships and can trigger interest or lost discounts. The aim is to pay on the due date, not early and not after it. Where a supplier is flexible, ask whether terms can move to better match when your own customers pay you.

If you carry inventory, identify the items that have not sold in a long time. Stock that sits is cash you cannot spend. Consider whether slow items should be discounted, returned to the supplier, bundled or not reordered. Compare order quantities with realistic demand rather than with the minimum a supplier prefers. Inventory valuation affects your financial statements and your tax return, so discuss any write-down with your accountant before you record it.

Plan for the payments that arrive on a schedule

Some of the largest cash calls are predictable and easy to forget. Payroll deductions are remitted on a schedule set by your remitter type; for a regular remitter, the CRA’s page says the due date is the 15th day of the month after the remitting period. GST/HST returns for monthly and quarterly filers are due one month after the end of the reporting period, and filing is required even when you owe nothing. Corporations are generally required to pay income tax in instalments, monthly unless they qualify to pay quarterly, though a corporation is not generally required to pay instalments for most corporate taxes in its first tax year.

Put these dates on a calendar and keep the amounts in a separate account where practical. GST/HST you have collected and payroll deductions you have withheld are not working capital, even though they sit in your bank balance. Counting them as available cash is a common reason a business feels well funded until the due date arrives.

Decide how to cover a gap

After the steps above, some businesses still have a timing gap between paying costs and being paid. A line of credit is designed for short-term gaps like this; a term loan is better suited to long-lived assets. Be wary of using short-term borrowing to cover a loss that is not temporary, because that only delays the problem.

Before approaching a lender, prepare current financial statements, an aging report and a short forecast. Lenders look at working capital, but they also look at the quality of the balances behind it, which is another reason clean books matter. An accountant can help you present the numbers and explain unusual items before they raise questions.

Make it a monthly habit

One round of cleanup helps, but the benefit fades unless the review repeats. Add three items to your monthly close: the aging report, the supplier payment schedule and the working capital trend. Keep the notes short and assign an owner to each action. A quarterly conversation with your accountant can then focus on decisions, not on reconstructing what happened.