What exactly is working capital? In simple terms, this is the
difference between a business’s short-term assets and short-term
liabilities. Put another way, working capital represents the
difference between what the firm owes and what it owns. Without
sufficient working capital, a business simply won’t have the cash
it needs to fund daily operations and future growth.
Now that we’ve established the importance of working capital,
let’s look at a 9 ways in which it can be improved.
- Maintaining working capital is everybody’s
responsibility.
- Pay suppliers on time.
- Control expenses carefully.
- Watch your stock.
- Consider introducing e-procurement.
- Talk to alternative lenders.
- Emergency loans can be a short-term
solution.
- Asset-based financing can be an asset.
- Invoice factoring and discounting releases the cash
tied up in your sales ledger.
1)
- Many businesses rather short-sightedly imagine that working
capital is solely the remit of the finance team. Far from it. To
succeed, a company should implement KPIs on working capital that is
understood by everyone in the management team. Where necessary,
specialist training should be delivered so that everyone shares the
same outlook on financial management.
2)
- At first glance, this suggestion may appear strange: surely
paying as late as possible will improve a company’s working
capital? However, suppliers who are paid quickly and who do not
have to waste time chasing invoices are likely to be more flexible
when it comes to prices and terms of business.
- Effective negotiating is central to every business, and it
makes good sense to assign each supplier a named contact who can
build a close and mutually respectful working relationship.
3)
- In a large company, it can be tempting to ignore small
expenses. This is extremely unwise, as they can mount up
significantly and substantially affect the business’s working
capital. Setting clearly understood rules for travel and
entertainment can make all the difference, while the introduction
of a corporate card program will allow management to view expenses
in depth and quickly take remedial action where employees are
bending the rules.
4)
- Excessive stock holdings can tie up huge amounts of capital.
Overbuying frequently results from poor communication between
departments and can be mitigated by monthly or quarterly stock
checks, provided they are quickly followed up with remedial action.
At the same time, it is crucial to avoid stock shortages, so this
is something of a balancing act, requiring careful attention to
each product line.
5)
- E-procurement can reduce costs substantially: one survey
indicated savings of 18 percent when businesses used e-auctions and
carefully compared different suppliers’ terms. Choosing suppliers
with longer payment terms can represent a huge boost to your
working capital, so it is worth carefully examining the small print
and negotiating wherever possible. E-procurement also involves a
rigorous authorization process, which can assist in reducing
unexpected expenditures and protecting your working capital.
6)
- Bank overdrafts can be a good way to manage shortfalls in your
working capital. However, they traditionally represent a moderately
high risk for the bank and hence attract substantial interest
rates. Your company may be able to negotiate far more advantageous
terms with an alternative lender, who can offer you a choice of
emergency loans, asset-based finance, and invoice factoring and
discounting.
7)
- Emergency loans are an excellent way to address sudden
shortfalls in working capital. As the name suggests, speed is of
the essence and a lender can give you the financing you need in
less than 24 hours.
8)
- With asset-based financing, you can borrow against the value of
your premises, plant, and equipment. This is a longer-term method
of financing, with competitive interest rates as the loan is
secured on an asset.
- In many cases, alternative lenders will use a panel of
providers for asset-based loans, enabling you to negotiate the most
competitive rate and the most appropriate repayment period–whether
you want to make a quick repayment to reduce the total interest or
spread the loan over a number of years to reduce your monthly
outgoings.
9)
- Invoice factoring or discounting enables you to borrow up to
around 85 percent of the value of your invoices as soon as you
raise them. You then repay the loan, as well as interest and
charges, once your client has paid you. Choose factoring and the
finance company takes ownership of your debtor ledger and deals
with all aspects of credit control. Their expertise will probably
mean faster payments and hence lower interest charges.
- However, you may wish to keep control of your own debtors so
that your clients do not find themselves dealing with a third
party. In this case, you should choose invoice discounting, which
simply provides the financing against invoices.
- However, you choose to address the issue, maintaining
sufficient working capital is crucial if you want to stay in
business. Make the right decisions and you will have the cash on
hand to pay your staff and suppliers, take on additional orders and
new clients, and most importantly invest in the future growth of
your business.