What is the cost of capital?
The cost of capital is the minimum return a business must earn on its investments to satisfy its lenders and equity holders. It includes the weighted average cost of debt and equity. For a small business, this rate helps evaluate whether a new project or purchase will generate enough cash to cover financing costs. A typical calculation uses the interest rate on loans and the expected return demanded by investors.
How do I close a cash gap?
A cash gap occurs when cash outflows happen before inflows. To close it, focus on reducing days sales outstanding by offering early payment discounts, tightening credit terms, and automating invoice follow-ups. Also, negotiate longer payment terms with suppliers and streamline inventory turnover. Many businesses reduce their cash gap by 10–15 days within one quarter using these methods.
What is a working capital audit?
A working capital audit reviews your company’s current assets and liabilities to identify inefficiencies and risks. It examines accounts receivable aging, inventory levels, accounts payable terms, and cash conversion cycle. The audit produces a report with specific recommendations to improve liquidity, reduce carrying costs, and avoid unnecessary borrowing. It is typically conducted quarterly or after a significant change in operations.
How to optimize accounts payable?
Optimizing accounts payable means balancing timely payments with preserving cash. Start by categorizing suppliers by strategic importance and payment terms. Use dynamic discounting for early payments when cash is available, and extend payment terms for non-critical vendors. Automate invoice processing to avoid late fees and take advantage of early payment discounts. A structured approach can improve your cash conversion cycle by 5–8 days.
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