Optimising working capital can mean the difference between failure and success

2011 has begun with the same uncertainty we saw in the last quarter of 2010. Market reports on business performance continue to contradict each other, the economy persists to operate at two distinct speeds and consumer spending remains tepid.

Now is the time for businesses to remain focused and ensure they are operating efficiently, delivering value to their clients and utilising their working capital in order to keep the business on track. 

As an accountant and virtual CFO working with SMEs, I often come across businesses that are making a profit but still having trouble coming up with the necessary cash to pay their suppliers and creditors.

The reason for this is they aren’t making the most of or are not appreciating their working capital and worse still they don’t understand the difference between working capital of cash flow.

Put simply working capital is current assets minus current liabilities. It is how much liquid assets the company currently has to build its business, fund growth and produce value for the owner.

Optimising your working capital can mean the difference between growth and failure, allow you to utilise your resources to help your business and give you the flexibility to introduce new divisions, key products and/or services and help you to achieve success.

This is all very easy to say, but what most businesses struggle with is how.

Here are some general strategies if you find yourself with short or long term working capital issues:

1. Put emphasis on the importance of real time information so you get a clear picture on your daily/weekly/monthly/quarterly working capital needs
2. Actively work to reduce the payment collection period of debtors. This will your working capital requirement and will free up cash flow (have a look at my previous blog post on the cost of debt recovery)
3. Better manage your expenses and creditor responsibilities to create better cash flow. Look at extending your payment terms with suppliers to alleviate immediate cash flow concerns or put in place payment arrangements for your liabilities
4. Implement more effective stock control. Much of a small business’ (particularly those in retail and manufacturing) working capital is tied up in stock and a key issue is to find the optimum inventory level to minimise the cost tied up in inventories. Doing regular stock takes is also highly beneficial
5. Speak to your bank manager about financing options to support your short, medium and long term liquidity issues. This may include debt financing or extending your overdraft facilities
6. If your business is growing rapidly and this is creating short term liquidity issues, consider raising capital or attracting key investors to your business
7. Reduce costs and increase income. Invest in your sales process and push new business to improve your short term and long term working capital issues.

Businesses that can effectively manage their working capital have the opportunity to improve their cash flow, costs and services/products plus they can also become more agile and flexible against their competitors, which is very important when operating in an uncertain market.