FD Insight: Managing working capital

June 4th 2014 | Posted by phil scott

Managing Working Capital 

A business is only as successful as its working capital. You can be the hottest property, have the fullest order book or the longest waiting list, but if you don’t have more money coming in than you having going out you’re on borrowed time.

Nobody knows this better than the finance director, so we took the opportunity at a recent FD Recruit – FD & CFO Conference to ask them to speak openly on the topic.

We talked all things working capital and probed some of the sharpest finance minds to compile a guide to staying in the black.

Here, then, is how to keep your capital healthy the way some of the UK’s most successful finance directors do it.

Monitor cashflow and draw up predictions
Though working capital is the lifeblood of a business, an alarming number of organisations fail to keep proper tabs on what’s coming in and what’s going out – and, most importantly, when these transactions take place.

Keeping an eye on your working capital is the simplest way of avoiding problems. And by using projections, you can easily spot difficulties ahead of time and give yourself plenty of opportunity to navigate them without too much stress.

By predicting stock and inventory levels, especially if some of your products are seasonal, you will be able to better manage your orders and payments. Most bottlenecks can be avoided with some basic planning

Get friendly with your suppliers
Many business experts will talk of the virtues of building relationships with customers, but building relationships with suppliers can be just as handy. Plus it’s easier, because they’re almost always eager for your custom.

The benefit is that a good relationship will allow you to negotiate better terms. You can ask to stagger your payments, for example, which avoids paying out large sums all at once. And if you find yourself in a tight spot when an invoice is due, a supplier you are friends with is much more likely to be willing to give you a little more time.

And don’t forget your bank manager. They are a supplier, too. Keep them on your side, as they have the keys to future additional finance.

Get tough with customers
Sure, customers are important to your business. But that doesn’t mean you need to fold on their every demand.

If a project is going to kick a huge dent in your cashflow, be brave and ask for some payment up front. By explaining the burden you will be shouldering by taking on the order, most reasonable businesses will be open to the idea.

And when payment is due, make sure it is paid. Get tough, if you have to. After all, when a customer doesn’t pay up it hurts your business – no matter how excited you were to land the deal in the first place.

By making sure that you have a full dispute resolution process in place, you will ensure that any customer queries and complaints can be dealt with quickly. The longer it takes to resolve a situation, the longer you will be waiting for payment.

Don’t feel though you’re above assistance
The government, and some private organisations, have grants, loans and other financial assistance for companies who are new, looking to grow, taking on employees or doing something different.

The money is out there and needs a home. Some FDs have seen resistance to accepting a bit of help as there is a fear of how it will be perceived by outsiders, but some of the biggest companies in the world accept financial assistance so yours certainly can.

Plan for the bad times
All the plotting, planning, befriending of suppliers and getting tough with customers will never make your business entirely immune from hiccups.

All businesses suffer from them from time to time, and planning for “what if” scenarios isn’t admitting a weakness. It’s the smart thing to do.

Take time out to predict any stress points your business has financially, and write up a plan of action for if something does go wrong. And once you think you’ve covered everything, write up another plan of action for how your business would cope if that one unforeseen event does occur. Because there’s always that one thing that nobody saw coming. And when it does, you’ll now be prepared!