Rule 1: Cash is King

By Anita Jaynes on 26 February, 2021

Post sponsored by Purple Lime

Every business owner wants to earn money and generate a profit. It is the whole point of being in business. And to achieve that goal, it is important to offer quality goods and services to your clients and stand out from your competitors. If a business is profitable, it makes good business sense to reinvest that profit back into the business, giving you the ability to grow, improve your services, add new services, and reward the people who made it possible. 

These steps will probably be in any good business plan.  But in reality, business owners can struggle to manage cashflow and reinvest in the growth of the business. This lack of capital can suffocate a business’s potential and limit it’s successful. A business can look profitable on paper, but with a lack working capital, it may not be the most successful.

The Importance of Working Capital

When we talk about working capital, we are talking about the amount of money a business can readily access.While it can be complicated to work it out exactly, the simple explanation is that it’s your current asset value (cash/debts owed to the business), less the value of your current liabilities (debts due to suppliers/HMRC). You want this number to be positive, and fairly healthy, so that you can afford to run your business smoothly without facing problems meeting your financial obligations.

Efficient working capital is key to maintaining a healthy cash flow and a healthy business. Managed properly, working capital maintains smooth operations, and can help improve the company’s earnings and profitability.  But for some businesses maintaining this can be a challenge, with late or missed payments leading to issues paying bills, and over time causing significant issues. 

Top Tips for Improving Your Working Capital

If you are struggling with cashflow, a lot of businesses will approach this subject with one thing in mind – business financing. However, accessing financing can be a complex thing, and depending on your position and type of business it might not be the best choice for you. So, while business finance might be one way to improve your working capital – it is not your only option.  To expand on this, here are a few other things you can try to improve the working capital position in your business:

Shorten your sales cycle. Your sales cycle starts when you begin spending money to work on a project and ends when you receive payment for that work.  Keeping the time between point A and point B as short as possible is a great way of improving your cash flow. Be sure to send invoices promptly – if you delay invoicing then you will stagger your profit and ultimately hurt your cash flow.  You could also consider offering incentives for early payments as well as penalties for late payments.

Consider credit checks. It sounds bad, but customers with bad credit scores may have a negative impact on your business – possibly in the form of late payments or non-payments. So, before you take on a new customer you want to make check their credit rating.  Credit checks are a simple and easy way to give an indication of whether your customers are likely to pose a credit risk.

Use technology.  There is a wealth of technology available to assist with maintaining a healthy working capital position. Examples include online payment platforms which make the payment process an easy and efficient experience for the customer, applications which can integrate with your accounting platform to automate the credit control process, and cash flow forecasting applications which provide business owners a live, accurate view of their working capital position. The use of technology is a game-changer when it comes to cash flow management!

Review your spending. When it comes to spending, you should aim to be as transparent as possible. That means looking at exactly how much your budget is, how it breaks down, and how it compares to what you’ve been spending. It can be a time-consuming exercise but do make a habit of reviewing those direct debits, annual agreements and supplier contracts.  Small savings throughout your profit and loss account can have a significant impact on your working capital.

Avoid stockpiling. Imagine your inventory as a big stack of money. Every unsold item sitting in your warehouse is essentially a stack of money sitting on a shelf. You cannot access that money until you sell it, so for now it is not of much use to you. This decreases your liquidity and makes your business less agile, and less competitive. To maximise your working capital, try to time your supplies and products to arrive when you need them. This means less capital tied up in stock, and a much healthier cashflow for you.

Of course, there are plenty of other ways to manage your cashflow effectively, but these are just a few examples to get you started. At Purple Lime, we work closely with business owners to not only help them understand their cashflow but improve it with the use of management information and technology. If you would like to know more, please email or call us on 01249 691360.

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