fbpx

Managing Working Capital in your business

Author - Tom Whitworth

Managing Working Capital in your business

Managing Working Capital in your business

Effectively managing working capital is often the secret sauce of many of our successful SME clients. Marketing their products well, treating their customers like rock stars and looking after staff are only made possible because they know that they are on top of their working capital, and have access to excess working capital when opportunity strikes.

When it comes to working capital solutions, it’s important that they address the three main components of working capital:

Accounts Payable: This is the money that you’re required to pay out over the short term. Businesses often seek to find the “sweet spot” when maintaining maximum cash flow by delaying their accounts payable however this can lead to negative outcomes with suppliers, credit ratings and business trust. A lot of businesses aim to have a shorter receivables gap than payables, allowing money to come in from sales to pay for the outgoings.

 

Accounts Receivables: This is the money that your customers and clients owe you for sales already made. Ensuring speedy payment of your sales is essential to ensuring smooth working capital management. While your accountant rightly lists your Accounts Receivables as an asset on your balance sheet, it’s important to remember that they’re not actually assets until the money is in your bank account!

 

Inventory: This is important because it’s typically the primary asset that is converted into actual sales. Determining the right amount of inventory to have on hand is a key factor in working capital management. Too little stock, and you risk losing out on sales revenue. Too much stock, and you risk having a lot of cash tied up in the storeroom, meaning that you end up with not only an inefficient use of working capital, but also reduced cash on hand.

Unfortunately, most of our clients were let down by their banks when it came to working capital finance. SMEs can have trouble access additional capital through traditional institutions, often because they are perceived to be riskier or outside of the “lending appetite” of the larger institutions. When there is assistance available, it’s often only available to property-backed SME directors and can come with strict caveats and restrictions.

One of our clients, who runs a family friendly restaurant, experiences far greater volumes during the summer months and school holidays, and significantly less during the winter months. However, their business still needs to pay the rent, pay suppliers and importantly, look after their loyal staff with sufficient shifts. This all requires working capital so they can keep running smoothly as we approach the lean months and prepare the business for the growth it experiences as the sun starts to shine again.

Finstro’s Flexible Line of credit has allowed them to go into this coming winter period with confidence they haven’t felt before. They know that if revenue drops off more than expected they can pay off a supplier, rent, ATO or their BAS over six months, at a click of a button, to keep the cash in the bank account and resulting in less impact to the business’s working capital reserve.

Finstro’s Line of Credit allows for on-demand access to cash, which can be repaid between 1 – 12 months to bridge the gaps when working capital reserves are short (like a 6 month winter period!). All without having the ongoing commitment of servicing a 12-36 month lump sum loan, which sits on the business’s balance sheet, in the business bank account and attracts interest charges over the period – therefore costing the business even more money.

It’s hearing these kinds of stories from my account managers, as they work closely with business owners like these, that inspire me every day to work with our great team at Finstro, as they create better options for small businesses looking to grow.