Working capital management can be a complex field, but it simply can’t be ignored and is perhaps best broken down into individual segments. By taking control of each of these, you can make sure that you stay a step ahead of your competitors by making the most of your resources and safeguarding yourself against sudden financial issues.
Cash
Managing cashflow is the key to maintaining a stable business, and it’s simply a matter of finding the balance. Too much cash being handled within the business comes with costs, including missing out on interest. Too little, on the other hand, can leave you struggling to meet the expenses of everyday operations.
Especially for new companies, getting this right can be a process of trial and error. If you’re unsure, it’s better to err on the side of caution and have more cash available than you need, but you should soon be able to identify a pattern and establish a sensible amount of in-house cash.
Inventory
Cash and inventory work neatly together, and every order you make from a supplier should be seen not simply as items, but as an equivalent to money. If you are making orders too regularly, you could be wasting money on transaction and delivery fees, but there’s obviously nothing worse than not having enough to make it through the day.
Of course, you do need to consider your particular industry here too; if your stock has a short shelf-life, like food or seasonal goods, you may need to order at a more frequent or sporadic rate than would be advisable for other business types.
Debtors
It’s wise to get to know your debtors and their trends. Most SMEs have a few very punctual ones that always pay in full and on time, but also a number that require a degree of chasing. You can use these statistics to get an idea of when money will come in and how much to expect. This goes back to cash management and the benefits of finding the balance between too much and too little.
Short-term finances
If you take out a bank loan to support your business, this needs to be managed in the same way as you would for a personal loan. Make sure that your repayments fit in with your working capital cycle.
Of course, the value of an accountancy expert cannot be underestimated in managing working capital, and many companies make use of a financial outsourcing service to ease the workload and time constraints on their in-house staff.