7 tips on maximising your working capital

Cash is king – an old chestnut, but it’s always suprising how easy it is to lose sight of the basics when you’re running a small business. David Bloom provides a useful cash flow check list.

4th September 2009 at 10:10 am

In short the quicker you get cash in the door from your customers and the slower it has to leave to pay your suppliers, the better as that cash stays in the business and works harder for you. Some business models work a lot better than others in this regard.

If you’ve got large blue chip customers who don’t pay for 60 to 90 days and expensive staff who need a pay cheque every month, you’re going to have a bigger challenge managing working cap than say a restaurant where cash is in the till before you have to pay for food and wages – nice!

Here are seven tips to maximise your working capital assuming the business is trading normally and not in some kind of crisis or recovery situation.

1. Minimise your payment due date on your invoices

On your invoices clearly state “Payment due within X days”. Then ask yourself why this can’t be “Payment due on presentation of the invoice”. The answer may be due to industry standards for your line of business. Just remember if you say 30 days, you won’t get paid until Day 45 or later so you might as well put the earliest date possible.

2. Stay on top of collections

Cash is the lifeblood of your business. Those invoices you’re sending out need monitoring and collecting on. It is a fact of business life these will not get paid on time and you have to proactively manage the debtor’s ledger. Make this part of the job of your finance manager and/or admin support in the office, if one is available.

3. Margin – look for the 80:20

Make sure you know which products or services you provide generate the most gross margin. Often times 80% of your margin will come from 20% of your product or service. Unless there is some strategic reason why you need to, don’t waste time and effort on chasing in cash and paying suppliers for product that add nothing to the bottom line or worse, lose you money.

4. Stockholding – the cardinal sin

Related to margin, don’t keep cash tied up in stock. Knowing your sales volumes will help you keep track of how much stock you should be holding.

5. Keep a rolling weekly cash flow

Forecast your cash requirements on at least a rolling 12-month. Know when cash is tight which is usually around month end for salaries and quarter end for VAT and rent payments. If you don’t know where you are with cash it will bite you hard and possibly give you a fatal wound.

6. Communicate a payment policy

Let your suppliers know that you do one payment run a month and it’s on X date. Let them know that payment dates are in the month following receipt of invoice. Depending on the size of your suppliers, some will accept and some will dictate to you. Having one a month will also free up your finance manager’s time for collections.

7. Treat your preferred suppliers different to other suppliers

If you have key partners such as licensors, business advisers, treat them like employees and pay on time unless cash flow dictates otherwise. Do not let poor payment become a demotivator or bone of contention with people critical to your success.

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David is the MD of FD Unlimited the providers of outsourced financial director services for SMEs. He is an experienced commercial international CFO in media and technology. He has over 20 years experience working with fast growth public and private companies including Getty Images (NYSE: GTY), Glu Mobile (NASDAQ:GLUU), Keystone Software PLC (AiM) and KPMG. http://www.fdunlimited.com/

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