Ways to improve your working capital

Ways to improve your working capital

Alternative Funding

The banks unwillingness to lend to SME’s has put a strain on the working capital management of many businesses. It is better to meet with the bank sooner rather than later with a view to increasing loans or overdraft facilities. Alternative lenders should be considered as well as asset-based finance such as invoice discounting.

 Pay your suppliers on time

How does this work you may ask yourself. Companies that pay on time develop a better working relationship with their suppliers and are then in a better position to be able to negotiate better deals.

If you don’t have a good relationship with your suppliers, you could end up not receiving goods when you need them, the knock on effect is that you cannot fulfil your commitments and that is not good for your cashflow either.

Negotiate discounts with your suppliers

Often companies can benefit from discounts through early payment, bulk supply or regular orders. You need to consider what kind of leverage you can bring to each supplier.

One simple idea is for the supplier to have one name to contact at you company, making it easier to identify opportunities for bulk purchasing and discounts rather than many people contacting the supplier with smaller orders.

Expenses – make them more visible

Expense claims with small excess amounts can cumulatively have a negative impact on working capital.

Set clear rules in areas such as travel and accommodation and ensure that they are followed. Monitor expense claims as efficiently as possible to see where costs can be consolidated and savings can be made.

Manage your stock effectively

Holding unnecessary levels of the wrong stock can be one of the biggest drags on working capital. Stock problems often result from a lack of communication among different departments. Regular stock checks are part of the answer and the resulting information should be reviewed and acted upon.

One idea is to analyse revenue and sales of individual products and decide which should be “made to stock” and which “made to order”.

Manage the payment process more effectively

Customers will give all sorts of excuses to pay late. One of the most common is that the invoice raised is inaccurate, so make sure that accurate invoices are a key performance measure for receivables billing.

Bad debts are a particular drag on working capital in tough times. These can often be reduced by making more rigorous credit checks on new customers and managing credit limits more carefully.