“You’ve got to spend money to make money”
It’s a fundamental truth of running a resilient business that you have to continuously invest in building your business. If you’re not doing that, how do you stay prepared? How do you build the capacity to surf what the world throws at you – technology change, new competitors and market changes?
It’s particularly challenging in the midst of an ongoing global pandemic.
Making the most of your working capital – the money that your business runs on – is a fundamental strategy for a healthy, responsive business.
Your working capital is the difference between your company’s current assets such as:
And your company’s current liabilities, such as:
Reviewing and fine-tuning your working capital is like servicing your car. It’s something worth doing on a regular basis – at least annually – because you want good performance and longevity.
And if you haven’t done a Working Capital review recently, then NOW is the time to do it – because it could make a big difference to how well you do through the repeating impacts of the COVID-19 pandemic.
So here are seven steps for reviewing your working capital:
1. Liquidate your unused or unproductive assets
You do a stocktake every year – so use that stocktake like an investment portfolio review to review your assets.
Investopedia defines an asset as:
“An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.” – https://www.investopedia.com/terms/a/asset.asp
However, all sorts of things that accountants label “assets” (out-of-date work-in-progress inventory and defunct machinery) do anything BUT offer a future benefit.
So don’t just tick each asset off – check whether it’s being profitably used. If you haven’t used an asset in the last 2 years – or if it’s been losing you money instead of making you profits – then take a good hard look at what else you’re losing by holding on to it.
Imagine that all your unproductive assets turned into cash – where could you invest the money? What would you save on maintaining them? What could you do with the space they’re taking up?
Assets tie up your working capital. That’s an opportunity cost – because they’re money you could be investing elsewhere in your business. So find a strategy to access their value, such as:
2. Restructure your business debt
The finance market is – like the rest of the business world – constantly changing. That means there’s a whole range of flexible finance on different terms and conditions out there in the marketplace. And government support options come and go all the time.
(Such as the SME Business Recovery Loan Scheme, which offers Australian businesses capped, low cost loans to help them through COVID.)
That means that you need to regularly review your business debt – especially if you have an inflexible business loan from a major bank. There are a wide range of reliable finance products with a whole range of terms and conditions.
There are a range of flexible business finance available that can help you free up working capital to invest in building your business. Some flexible options include:
It’s worthwhile seeking advice on which options best suit your business needs and goals.
Even if you have these options in place, it’s worth reviewing your finance option, to check whether you can access a lower interest rate or better terms that will save you money in the long run.
It’s like checking your phone contracts, or your electricity supply contracts, or your credit cards regularly – there’s often a better deal out there.
3. Invest your excess working capital
Don’t let your available cash become a couch potato.
If you have excess cash sitting in your business bank account, it’s virtually earning you zero interest. Australia’s interest rates are currently at record lows, and they’re likely to stay low until at least 2024.
So take a look at investing those funds where you can get a decent return on them. There’s a real opportunity cost – because you’re missing out on earning a return on these funds if you leave them in a low-interest bank account for any length of time.
Your business should be returning you between 10% and 25% per annum on your investment. So if the bank is paying you 3% interest on what’s in the bank then you are losing between 7% to 22% a year.
4. Carefully manage your inventory levels
Being either understocked and overstocked can negatively affect your working capital.
Too much stock can soak up your working capital and leave you short of cash to meet daily expenses. Too little stock cuts into the efficiency of your operations. The skill of a successful business owner is to walk the fine line between over and under stoked
If you’re understocked, you’re missing out on sales, you’re disappointing your customers, you’re overpaying when you HAVE to buy inputs at a premium AND you’re stressing your Logistics, Accounting and Production staff with endless juggling acts which is a big hit to your productivity.
On the flip side, if you’re overstocked, then you have too much of your working capital tied up in stock that won’t sell quickly – and that stock is costing you big-time in warehouse space and administration while it’s gathering dust.
If you’re not disciplined about your inventory management, you may well have quite a lot of warehouse space taken up with out-of-date stock and “orphan” items that your accountants don’t want to write off because of their asset value.
Those excess inventory items are 1) costing you money and 2) tying up funds you could be using to generate a better return elsewhere.
5. Carefully manage your accounts receivable
We don’t need to tell you that it’s important to ensure that your customers pay you on time. You know what happens to your cash flow when they don’t.
But it can be painful, and you don’t always have a lot of influence over big customers.
However it’s important to recognise that this is about more than temporary pain – it is also about the lost opportunity costs of missed investment in business growth.
That makes the uncomfortable work of Accounts Receivable one of the most important jobs in your business. So ensure that you have good systems and processes in place to follow up on payments – along with the internal resources to do this vital work.
It also means keeping a close eye on the payment and credit terms you (and your sales team) are offering, so that you’re not giving your future away to buy sales today.
For some businesses, Debtor’s Finance allows you to keep your longer credit terms for your customers so they can pay when they’re ready. In the meantime this gives you access to funds from the unpaid invoices whenever you need to draw down from your line of credit.
WARNING: Debtors Finance comes with some very visible changes that may impact your customer’s perceptions of your business longevity, so get strategic advice about whether it’s a good fit for your business.
6. Offer an early payment discount to your customers
How would your business change if customers always paid your invoices early? What could you do with that money in the bank? How much might you save in administration costs and cash flow hassles?
Look at adding real-time early payment discounts into your invoices and experience the cash flow improvements first hand. Today’s technology tools – such as the software we provide – enable you to offer variable discounts based on how early your customers pay their bills.
Early payment discounts mean that your customers will want to pay you early because the earlier they pay, the bigger the discount. Conversely, if they pay late, they miss out on the full discount.
If you’re currently offering sales discounts, then it’s often a good strategy to convert them into early payment discounts. There’s no extra cost to you, the customer still saves – but you get paid faster. You have fewer hassles, you convert sales into cash faster and can even win more customers.
If you are tired of chasing down invoices, reconciling short-payments or borrowing to bridge the cashflow gap, an early payment discount can break that cycle – and without adding extra work for your accounts clerk.
That means it’s easy to reward your customers for paying early and importantly, freeing up cash to spend doing what your business is meant to do.
Want to use our software to administer & drive your current discount program? Call us today.
7. Take advantage of government financial assistance programs
Both Federal and State governments have implemented a range of schemes to help businesses recover from the ongoing economic impact of COVID-19. They’re changing all the time, and many have been extended due to Omicron.
One example – and our current “pick” – is the SME Recovery Loan Scheme. This Scheme enables businesses with an annual turnover of less than $250 million to access partially government-guaranteed loans of up to $5 million. It’s the best government assistance out there – and it’s quick and easy to get with the right advice. It’s just like a credit card application – AND it doesn’t need you to put personal assets on the line.
There are also ongoing support and development programs as different governments respond to different issues and invest in different industries.
It’s worth checking with experts on a regular basis to make sure you’re not missing out on assistance that you qualify for.
Business finance is constantly changing
Financial products, financial strategies, and various forms of assistance change as much as the technology that drives our communications. There are no “set and forget” options that work for small businesses for the long term.
Reviewing and re-tuning your business finance and your business processes can free up the cash to build your business.
If any of the products or services discussed in this article could help your business build resilience and growth, then get in touch today.
+61 407 477 555