If you don’t pay yourself first, you won’t have the ‘running money’ to improve working capital.
Maintaining optimum working capital is critical
You can run your business at a loss for some time, but if you run out of working capital, or cash to operate the business, you are in trouble. The impact of ineffective working capital management can be complex and just as debilitating for a business.
Businesses with good working capital management practices not only generate more cash from their businesses, they have more flexibility to take advantage of opportunities as they arise and are less dependent on external financing.
The faster a business expands the more cash it will need for working capital. While the cheapest and best sources of cash exist as working capital right within the business, prudent borrowings could be your best option. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of your problems with working capital and sales growth.
As a consequence, you could reduce interest costs and have additional money available to support sales growth. You could also negotiate improved terms with suppliers (get longer credit or an increased credit limit) and effectively create free finance to improve working capital and help fund future sales.
“In your business, make a ‘wages first’ policy to improve the performance of you and your employees”. Peter Sergeant
Ways to improve working capital
It can be easy to do some of the things listed here, but there will be some difficulties in implementation in the short term, but it will be worth the effort.
- Limit spending to a minimum, until the ratio is right for your business.
- Try to tie every expense to generating profitable revenue.
- Keep inventories low and dispose of slow moving stock quickly.
- Sale of obsolete and underutilised plant and equipment.
- Make more efficient use of your building facilities, rent out excess space.
- Prudent low interest, longer term borrowings, could be your best answer.
- Try hard not to tie up your funds in fixed assets.
- Evaluates how hard your money is working for you.
- Use technology to identify and help solve control weaknesses.
- Make cost savings with improving productivity.
- Improve collection through focusing accounts receivable management effort.
- Make better, faster and more informed business decisions.
- Monitor your key metrics weekly.
- Use external facilitators to help you.
It can be tempting to pay cash, if available, for fixed assets (Vehicles, computers, plant, furniture, even new carpets). If you do pay cash, remember that this is no longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investments (loans, renting, leasing, even sharing with another organisation).
Similarly, if you pay dividends, increase drawings, or buy expensive toys, these are cash outflows and, like water flowing down a plug hole, they remove liquidity from the business.
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Keeping your business financially sound requires that you pay close attention to the financial matters in a consistent way as working capital can suddenly dissipate.
This means having sound bookkeeping and a good accounting system which will provide you with good control over you working capital. Don’t procrastinate install the best systems you can afford, none of which are overly expensive and affordable for every size organisation.
Each component of working capital has two dimensions, time and money. By using good systems in a timely manner, the money flow is maintained. Remember, if you have a working capital problem, it could well be a symptom of something seriously wrong with your business or non-profit organisation.
In my case, I have had times when I was not able to control either the timing or the money flow. Drought and health problems can put paid to you very best intentions to maintain a good level of working capital. This is where sound money management and insurance play a big role, as without either of these things failure is inevitable.