Unlock your working capital and use it to grow your business

While it seems most small businesses are struggling, there are some which are flourishing. The secret to getting ahead in today’s tough market is being able to unlock your business’ working capital and leverage it to create stronger cash flow, more growth and bigger profits.

Working capital represents your current assets, like cash, debtors and inventory/stock against your current liabilities, like creditors, tax and loans. It’s the money you use in the day-to-day running of the business as well as the capital used to invest in its growth, like buying new equipment. So the more working capital that’s in the business the healthier it is and the bigger potential it has for growth.

The key steps to unlock your working capital include:

Understand your cash flow. 
Preparing a cash flow plan will allow you to forecast cash inflows and outflows. It should be prepared monthly and look at the next three months as a minimum. This will:

• Provide early warnings of potential cash shortages so action can be taken quickly
• Identify if additional funds will be needed
• Indentify potential surpluses that can be invested to generate additional income
• Help to manage tax obligations
• Assist in any funding applications from banks.

Improve debt collection. 
Many businesses are finding this difficult at the moment and are feeling the pressure from reduced cash flow. But there are ways you can improve:

• Improve your invoice procedures to ensure invoices get sent out at the earliest possible time and are followed up before they become overdue
• Reduce customer payment arrangements from 30 to 14 days. This will to allow you to collect money earlier and pay your bills later, thereby increasing cash flow
• Offer incentives for early payment
• Set realistic credit limits for customers
• Screen your customers carefully to ensure they are able to meet their payments
• Provide progress payment terms.

Better manage creditors. 
It can be a fine balance between getting paid and when you pay your creditors. Tactics to consider include:

• Negotiating with creditors and suppliers for extended payment terms to alleviate cash flow concerns
• Using trade credit where available
• Calculating the benefits of making prompt payment to creditors.

Ensure good stock control. 
A significant amount of working capital is often tied up in stock (particularly for those in retail and manufacturing) and the key is to find the optimum inventory level to minimise the costs of holding stock and the likelihood of having to heavily discount or write off inventory.

• Do regular stock takes
• Improve ordering procedures to decrease errors and create efficiencies
• Improve sales projection accuracy to decrease the risk of over ordering
• Consider implementing just-in-time capabilities, so stock is delivered just before or as it’s required, helping to minimise holding costs.

Many people mistakenly believe that to improve cash flow you should concentrate on generating more revenue. However, what will ultimately guide you in improving your business’ working capital and its potential for growth is to focus on what delivers profits back to the business. Whether you’re considering reducing your stock levels, changing your invoicing procedures or introducing new products or services, you should always be asking yourself, “How will this improve my profits?”