Improving your working capital cycle
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.
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.
Working capital cycles vary by business type, and in broad terms work like this:
Purchase stock > Make a sale > Send an invoice > Receive cash (to purchase more stock)
Purchase stock > Make a sale > Collect cash at sale (to purchase more stock)
Work in progress > Delivery > Send invoice > Collect cash (to fund more work)
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:
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?
Here are some things you can do that may help you speed up your working capital cycle:
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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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.