Your business can benefit from regularly reviewing its working capital requirements.
As many businesses fail due to a lack of cash, effective cash management is crucial.
This entails having a full understanding of your business' working capital needs.
Possible delays to the supply chain, and general uncertainty around the economy, will likely have an impact on your cash position, whether you import goods or not.
Monitoring your cash position and looking forward will help you ascertain whether you need additional support, either with managing your cash or reviewing your needs for working capital.
If you can foresee potential problems, even if there is some uncertainty, the sooner you speak to lenders and investors, the better.
What is working capital?
In simple terms, working capital is the money you have available to fund your business' day-to-day operations.
In practice, a lot of your money will be tied up with customers, owed to suppliers and HMRC, or used for stock or works in progress.
As with many businesses, the ebbs and flows of your working capital will follow a regular cycle, but it may also be highly seasonal.
Why is it so important?
More effective management of working capital can help make your business more resilient - for instance, when faced with tougher trading conditions.
It can also reduce your need for growth finance.
Working capital is vital because your business needs ready cash to meet its day-to-day needs, such as paying suppliers or salaries.
To make sure you have enough working capital, you must:
- calculate your current levels
- project your future needs
- consider ways to ensure you always have the cash you need
Learn more about why managing cashflow is important
Common working capital issues
You might need more working capital for a variety of reasons, including the following:
- To grow your business, as you'll incur costs before you receive cash for your products or services
- Lack of visibility on cash and working capital performance across the organisation
- Lack of cash awareness across departments and geographies
- High levels of overdue receivables and bad debt write-offs
- Poor controls in relation to setting and managing payment terms of customers and suppliers
- Lack of co-ordination between sales and planning, coupled with a lack of visibility on stocks
Ways to improve working capital efficiency
According to Daniel Windaus, partner at professional services firm PwC: “The reality of the withdrawal from the European Union is that it will most likely lead to a raising of trade barriers with the UK's largest market. This in turn will have an impact on lead times and the length of supply chains that, together with higher uncertainty, will result in higher inventory levels for UK firms.”
Windaus advises that businesses do three key things to give themselves as much working capital as possible:
- Review lead times, safety and cycle stock to proactively manage inventory. This means engaging with your suppliers early and evaluating the needs for physical space, including warehousing, ahead of key trading times.
- Engage suppliers, customers and other key organisations to share assumptions, and re-evaluate who will bear the impact of working capital changes. Evaluate contracts and, if you need to renegotiate them, bring them into line to reflect the changed commercial realities.
- Model the potential changes in working capital requirements in a post-Brexit scenario, including the impact of trade barriers and potential currency fluctuations, to ensure headroom in financing is available.
Funding options to boost your working capital
There are a variety of ways to obtain funding to augment your working capital.
Learn more about the various forms of lending that are available
You should seek independent advice when deciding which option is best suited to your company.
Reference to any organisation, business and event on this page does not constitute an endorsem*nt or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circ*mstances and, where appropriate, seek professional or specialist advice or support.
