Working capital is important for the successful, every day running of your business. It is defined as the amount of money that your business needs to meet your daily financial obligations. Working capital is an indicator of how effectively your business operates; an unhealthy working capital means that you will be unable to make payments on time and may be unable to make payroll at the end of the month. A healthy working capital lets you cover all necessary costs as well as those unexpected ones as well as allowing you to grow your business.
To make sure that you can boast a healthy working capital, there are certain things that you need to be able to manage. Improper supervision and you can seriously damage your business. The simplest way to improve your working capital is to take a look at all of your outgoings. The fewer outgoings that you have, the more cash that you will have available. Stock control has a major influence on your working capital; it’s not necessary to have a huge surplus of slow-moving stock. Equally, you do need to carry enough stock to meet demand. Stock control is a delicate balancing act, and you won’t always get it right, but daily monitoring and regular analysis should help you to regulate stock levels.
Nurturing supplier and client relationships can lead to a healthy working capital if you are paying your suppliers as soon as the invoice comes in, but your clients aren’t paying for thirty days then you are left with a negative cash flow. If a supplier is offering you long credit terms then take them, there are rarely rewards for paying early. You are not obligated to offer long terms to your clients though, try to extend short terms to your clients, seven days would be ideal. The longer that you have between receiving payments and paying invoices, the healthier your working capital will be.
When clients are paying on time, you have no problems, but business is rarely that simple. What about the customer’s that pay late or try to avoid making a payment altogether? Make sure that you have a clear credit control procedure in place to deal with late payments before they cause too much damage. Consider credit checking new clients; this will give you an insight into their payment history and financial stability. If late payments start to overwhelm your credit control team, an agency like Commercial Domestic Investigations can help. Our expert team are trained in line with industry best practice and regulations. We can assist your team with any aspect of credit control, from credit reporting to invoice collection.