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When it comes to running a thriving business, understanding and effectively managing your working capital is crucial. Essentially, working capital is the cash readily available for the day-to-day running of operations. The more protracted the business cycle, the higher the working capital requirement tends to be. Your goal? Ensure you have enough working capital to cover operational expenses, with a reasonable buffer in place.

How to improve your working capital

Feeling anxious about your working capital? Don’t worry.  Let’s start by figuring out how much working capital your business needs. Using cash flow forecasting, you can proactively calculate when you might run out of cash and determine the minimum capital required to avoid that situation.

Ways to reduce working capital needs

The key to reducing your working capital needs revolves around reducing expenses. Here are some strategies to consider.

• Limit large personal withdrawals.
• Avoid buying major assets out of daily operating profits. Remember, other financing options are available, such as leases or loans.
• Refrain from overtrading, which can lead to increased overhead costs and delay customer payments.
• Assess your inventory costs. Think twice before placing bulk orders, even if it comes with a discount.
• Simplify payment collection. Explore mobile and online options to make it easier for customers to settle their bills.

Shortening cash cycles

One effective way to improve your cash flow is to shorten your cash cycles. This means that you should aim to reduce the time it takes to convert inventory into sales and then into cash. To achieve this, you can implement various strategies such as offering discounts for early payment, improving your credit and collections process, and utilising electronic payment methods.

Another key aspect of optimising your cash flow is to collect money from your customers as quickly and efficiently as possible. This can be achieved by setting clear payment terms and following up promptly on any overdue payments. You may also want to consider implementing late payment fees or penalties to encourage customers to pay on time.

Negotiating better terms with your suppliers can also have a significant impact on your cash flow. This can include negotiating longer payment terms or bulk discounts, which can help to reduce your costs and improve your margins.

Finally, it’s important to pay your bills faster than your customers are paying you. This may seem counterintuitive, but it can actually help to reduce your working capital requirements and improve your cash flow. By paying your bills promptly, you can avoid unnecessary interest or late payment fees, and ensure that you have sufficient cash on hand to invest in your business and take advantage of growth opportunities.

Forecast your cash flow and profit-and-loss

Accurate cash flow forecasts can provide valuable insights into your working capital, allowing you to take proactive steps for improvement. On the other hand, profit-and-loss forecasts help assess future profitability, enabling you to make informed decisions about your working capital needs.

Wrapping Up

The goal is to lessen working capital concerns by understanding what it is, how much you need, and ways to improve it. Once these processes are in place, managing your working capital will become second nature, allowing you to focus on growing your business and boosting profitability.

Remember, it’s always beneficial to consult with your accountant regarding your working capital needs and possible improvement strategies. We can assist you with this, and we’re here to help – get in touch now at info@pkbookkeeping.co.uk