Working Capital… What is it?
Put into an equation it looks like this.
Working Capital = (Accounts Receivable + Inventory) - Accounts Payable
Whereby you want your working capital to be as close to zero (if not negative) as possible.
Therefore you should look at paying your payables when they are due, get those receivables in as quickly as possible and have as little stock on hand as what is required to effectively operate your business. Simple in theory, but can be hard to implement for some companies.
So, what are the practical steps for implementing this
- Look at the wording on your invoice for payment terms
– does this make people want to pay you? We find what works is having a specific time period at the bottom of the invoice and sending email reminders a couple of days before it is due.
- Invoice your jobs as soon as you possibly can – this may mean negotiating for some upfront payment for products with a large lead time or services that have a timeframe of more than two weeks
- Give the customer ample opportunity to pay you even if this means cutting into your margin by a couple of %. Examples include accepting multiple payment options, direct debit, more credit card types etc. Have a think about what would work for your business.
- Always pay your payables on time but don’t go out of your way to pay early. This will increase your working capital and a good way to do this is to pay by credit card wherever possible and pay the full balance back on the due date.
- Negotiate better payment terms with your suppliers. This can be hard when starting out but in general the more choice of suppliers you have the easier it is to negotiate. If you are the type to need concrete evidence before going into a negotiation make sure you research other similar suppliers payment terms.
- Have a stock control system if you are a products based company. Consider how long it takes to get stock in from your suppliers and forecast when you will need more stock. Try to look at trends and seasonality of your product, for example will you have a mad Christmas rush?
- Last but not least, always see things from the customers point of view. So they aren’t paying, why not? Try to look at it from their perspective, this will help shed some light.