10 Working Capital Management Tips for Business Owners

1. Understand cashflow vs profit

Regardless of what kind of business you are in, getting to grips with the difference between cashflow and profit is very important. Cashflow refers to the money that flows in and out of your business. It includes the income from your sales as well as your outgoings on salaries, premises, equipment, supplies and so on. Profit, on the other hand, is the surplus left over from sales when all expenses have been paid for. Businesses that don’t make profit for a period of time do not necessarily fail if they have sufficient cash to keep going, however those that run out of cash almost always fail. This is why you will often hear the saying, ‘cash is king’. Monitoring cashflow, as well as profitability, is one of the most effective ways to spot potential problems and address them before they escalate and threaten the future of your business.

2. Raise invoices promptly

Prompt invoicing helps to reduce payment times. While raising invoices can seem like a boring task it’s very important. If you don’t raise your invoices, you won’t get paid.

3. Monitor debtors

Monitoring payment times alerts you to slow payers and provides an early warning of potential bad debts. It is good practice to look for ways to reduce debtor days so as to improve the efficiency of your business.

4. Focus on Forecasting

The more accurately you can forecast cashflow and profitability, the better you will be able to spot potential opportunities and problems and the better your planning will be. Many businesses use cloud-based accounting solutions that provide real-time information 24/7 however the information you get out of these systems is only as good as what you put in, so it is vital to ensure your record-keeping is accurate and up to date. If you struggle to keep on top of day-to-day administration, consider outsourcing your bookkeeping. This is a service FPM provides for many of our owner-managed business clients.

5. Optimise Stock and Work-in-Progess (WIP)

Managing stock has been a particular challenge for many businesses in recent times due to uncertainty about Brexit. However, as a general rule, it is a mistake to allow too much working capital to get tied up in stock because of the costs involved. Likewise, the value of WIP can reduce over time and customers may forget the value of the service provided.

6. Manage Suppliers

It is important to review contracts regularly and monitor what you are spending with individual suppliers. Failing to do this could mean that you may miss out on opportunities to negotiate better terms.

7. Control Overheads

Cost control and the elimination of unnecessary expenses will improve your working capital. Keep your overheads under review and look for opportunities to substitute cost-effective alternatives where appropriate.

8. Explore alternative financing opportunities

If you need to borrow to fund future development or growth, then well as looking at what credit the banks will provide for your business, it is worth considering other financing options. Depending on your business, options such as sales credit insurance, leasing, asset-backed finance, debt factoring and invoice discounting may have a role to play.

9. Tax

Appropriate tax and VAT planning can also help enhance your business’s working capital. Ask your accountant to review your tax as this is a good way to highlight potential opportunities and/or problems.

10. Aim to be self-sufficient

Generating cash within your business will help you to become self-sufficient. It will improve profitability and provide resources that can be used to fund growth. This is an important point to keep in mind when thinking about your working capital management.