Improving your working capital cycle
3-minute read
No matter what type of business you are, cash flow is king. Streamlining your working capital cycle – the time it takes to turn your existing assets into cash – could help your business stay healthy and primed for growth. All it takes is a few business smarts.
Key take-outs
- Each business sector has a different type of working capital cycle
- Improving your cash flow will shorten the cycle
- A shorter cycle returns cash to your business faster
- You can help improve your cash flow in a variety of ways
What is my working capital cycle?
Typically, the working capital cycle of your business is the journey it takes to turn your existing work or assets into cash. Understanding your working capital cycle is important, as it may help you identify where cash may be hiding in your business and how to set it free.
Are there different types of working capital cycle?
Working capital cycles vary by business type, and in broad terms work like this:
Manufacturer/wholesaler:
Purchase stock > Make a sale > Send an invoice > Receive cash (to purchase more stock)
Retailer:
Purchase stock > Make a sale > Collect cash at sale (to purchase more stock)
Service provider:
Work in progress > Delivery > Send invoice > Collect cash (to fund more work)
How long is my working capital cycle?
An example might be:
Time to sell stock following its original purchase = 55 days
Time to collect cash = 45 days
Total time waiting for cash = 100 days
During this 100-day working capital cycle your business will still need cash for:
- Wages
- Stock purchases
- Marketing
- Miscellaneous expenses
The shorter your working capital cycle, the faster cash will return to the business, and the faster your business can get where it wants to go.
So, what are some things that could help reduce those 100 days?
How can I speed up my working capital cycle?
Here are some things you can do that may help you speed up your working capital cycle:
Be smart with your debtors:
- Run credit checks
- Invoice promptly – every time
- Set clear payment deadlines
- Call overdue debtors relentlessly (it’s your money) or email them with reminders
- Offer payment plans for very overdue debts
- Reward early payers
- Offer convenient payment options (the more the merrier)
Manage your stock more efficiently:
- Plan for seasonality (all businesses have their ebbs and flows)
- Keep up-to-date records
- Reduce excess inventory
- Optimise sales forecasts
- Carry fewer stock lines – less is sometimes more
- Buy less more often
Streamline your work in progress:
- Use progress billing (just make this clear upfront)
- Identify and reduce process efficiencies
- Support and incentivise timely delivery
- Keep the customer happy (golden rule no.1)
- Roster effectively
- Consider using contractors
Avoid paying creditors early:
- Just pay on time – your suppliers will still love you for it
Don’t be fooled – cash can hide itself in many places in your business. Reviewing your working capital cycle can help you stay one step ahead, speed up your cash flow and unlock the cash you need to prosper. And what’s not to love about that?
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Things you should know
This information does not take into account your personal circumstances and is general. It is an overview only and should not be considered a comprehensive statement on any matter or relied upon. Consider obtaining personalised advice from a professional financial adviser and your accountant before making any financial decisions in relation to the matters discussed in this article, including when considering tax and finance options for your business.