What is working capital?
Typically, the working capital cycle is the journey your business takes to turn your existing work or assets into cash.
Products vs services
Purchase stock -> Sales -> Debtor (invoice) -> Collect later -> Cash
Purchase stock -> Sales -> Collect cash at sale -> Cash
Work in progress -> Delivery -> Debtor (invoice) -> Collect later -> Cash
Keep the cash flowing
The faster your working capital cycle, the faster cash will return to the business, and the faster your business can get where it wants to go. Makes sense, eh?
Time to sell stock = 55 days
Time to collect debtors = 45 days
Total time waiting for cash = 100 days
During those 100 days, the business will still need cash for:
- Stock purchases.
- Miscellaneous expenses.
A faster working capital cycle -> more secure cash flow -> business success
Speeding up the working capital cycle
- Run credit checks.
- Invoice promptly – every time.
- Set clear payment deadlines.
- Call overdue debtors relentlessly (it’s your money).
- Offer payment plans for very overdue debts.
- Reward early payers.
- Offer convenient payment options (the more the merrier).
- Plan for seasonality (all businesses have their ebbs and flows).
- Keep up-to-date records.
- Reduce excess inventory – see 9 ways to get rid of dead stock
- Optimise sales forecasts.
- Carry fewer stock lines – less is sometimes more.
- Buy less more often.
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.
- Pay on time – your suppliers will love you for it.
- Stop paying early.
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?
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.