4 valuable ways to improve working capital

Working capital is vital to success in business.  Quite simply, working capital is the available, accessible funds, which are used for growth or survival.

It is easy to focus only on the Profit & Loss figures.  While these stats tell an important story of a company’s financial track record, the actual working capital available to a business is also critical.

In an ideal scenario, a company is doing well on paper and in cash terms too, with cash flowing easily throughout the business.

What are some simple strategies that can be engaged to improve working capital?

1 – Focus on when cash comes in

It’s very important to be aware of when money is coming in to the business and to make this process as smooth as possible.

Focus on tightening up customer payment terms, making sure they work as well for your business as they can.

It’s impossible to avoid delays from some customers and it is this delay of cash coming in that has a knock on effect.  Keep payment terms as favourable as you can to ensure a swift flow of payment – perhaps even incentivise early or prompt payment.  The small financial sacrifice of an incentive may be outweighed by the fact that the money is in on time (or even early!)

2 – Strengthen relationships with valuable customers

Customers are the lynchpin of business.  It sounds simple, but this can often be overlooked – focus on the positive, profitable customers and don’t be afraid to let go of those that aren’t.

Profitable customers are ones that regularly buy your products or services, come back time and again, pay well and on-time.   Focus on a marketing & sales strategy that looks at retaining these clients, building two-way positive relationships and increasing the long-term relationship potential.  It is these customers who will have a positive impact on the cash flow of your business.

3 – Increase sales of the most profitable services and products

A business is likely to sell a range of services and products – some of which will do better than others, in that they sell better or have a greater profit margin.

It makes sense to focus on selling those products or services that make the most and have the largest margin, as this will be the biggest win in terms of working capital.   Thinking about giving less attention to those services that aren’t selling well and potentially re-evaluating them as part of your offering overall.

A business can think about ways to make its products and services even more profitable.  By packaging products together it is possible to create a new price point and push sales, increasing money coming in and contributing to an injection of cash flow into the business.

4 – Understand your business expenses

It can be easy to focus attention on ways to bring money in and take an eye away from business expenses.  But to improve working capital, these two elements need to work together.

A business should fully recognise all of their expenses, including when these must be paid and how the payment dates impact on business cash flow.  Negotiating favourable payment terms from suppliers is as essential as ensuring your own customers stick to their agreed payment terms.

Also, take the time to review all expenses and evaluate anything that isn’t essential to the business. Suppliers and costs can be streamlined, making savings, which will have a visible impact on working capital.