Cash is king, so they say, and if you’ve been in business for any length of time you’ll know that “they” are right. All businesses run on cash. If you have it you can keep going no matter what other challenges you may be facing. If you’re short of it then you quickly become restricted in how you can operate.
Cash gets used up in various different ways depending on your business model. In retail and wholesale you need cash to buy and hold stock. The more stock you hold, the more cash that gets tied up. In B2B businesses, like recruitment, construction and haulage, cash gets held up in outstanding client invoices. You’ve completed the job, logged the sale on your accounting software, but you may not see the cash for 30, 60 or 90 days.
No matter what sector your business operates in, the trick is to spend a little time thinking about how you can get that cash back in your pocket.
How to improve your working capital
So let’s take a look at our top 5 ways in which you can improve your working capital by fine tuning your operations.
1. Cut your expenses
Let’s start with the obvious. Spend less and you’ll have more cash. A good place to start is to log in to your business banking app and take a look at what direct debits are going out. Cancel them if you don’t need them. Then look at your bank statement over the last 3 months. If you can, export it to a spreadsheet and sort the transactions from the largest to the smallest. Go down the list and sense check what it is that you’re spending on. You’re busy, so choose the biggest costs to focus on. Read this article for more inspiration on cutting expenses.
2. Pay later
Have a chat to your suppliers when they’re in a good mood – Friday after lunch is always a good time. Ask if you can extend your payment terms. If you’re a good client then you’ll likely get a favourable reply. Alternatively shop around for suppliers who’ll give you longer payment terms. If you can hold on to cash for another week or two, then that is cash that can be used on other things.
On top of that you could use a business credit card for your purchases to improve working capital. A neat trick is to buy everything on the credit card, set your direct debit up to pay the outstanding balance in full each month, and then you won’t pay any interest. If you’re a B2B business you could also look into trade finance (if you have a purchase order from a client), so that a lender pays your supplier up front, and you repay the lender once you’ve sold your product.
3. Hold less stock
The more stock you hold, the more cash you have tied up in it. Can you think of ways in which you could reduce your level of stock without jeopardising your business model? Could you arrange more regular deliveries from your supplier rather than holding the stock yourself? You could also think about prioritizing your stock so that you hold the most popular lines, but then only order in the less popular items on request. Get yourself a good stock management system to help you with this.
4. Chase for payment
Once you’ve completed a job or delivered your goods you’re owed money. Raise an invoice straight away – all the accounting software providers and even some banks allow you to do this via app. Set up automatic reminders so that your client is chased before the due date without you even having to think about it. Make sure your invoice sets out an interest charge for all amounts owed past the due date.
Apart from that you could read up on invoice finance which is a bit like an overdraft linked to your outstanding invoices. You can use it on an ad hoc basis, or all the time to improve working capital.
5. Buy assets on finance
Unless you’ve got cash coming out your ears, buying big ticket items with asset finance or a loan makes a lot of sense. If you’re buying a piece of kit that is going to be workhorse for the next 5 years then there is good logic in also spreading the cost of that asset over the same period. Yes there’s a cost to the finance, but if you can invest the cash that you save into your business and make more profit then it’s cost-effective.