 |
When it comes to managing working capital, the first piece of advice from BDC Area Manager Nick Fry is "don't be reactive. Be proactive."
Entrepreneurs experiencing rapid growth are often confronted with the challenge of not having enough cash on hand to operate their businesses. "Be sure you're ready for growth and that you don't find yourself in the red without cash resources. It's a question of planning ahead. You don't want it to become a crisis before you go to your bank," he emphasizes.
Although working capital is seemingly a simple calculation of current assets minus current liabilities, business owners can easily lose sight of how much they need to keep their businesses operating smoothly. "In the daily grind, you may be more focused on making sales. But of course, it's not because you have revenues that you have money to spend," he says. For many entrepreneurs, for example, working capital can be tied up in delinquent client payments or overstocking inventory.
So how do you become more proactive and better manage working capital?
Get external help
BDC consultant Ed Klarich believes that many entrepreneurs could benefit from getting external help to assess their working capital needs. "At BDC, we can help entrepreneurs do a thorough cash-flow assessment and look at key areas such as their sales cycle, inventory turnover, and credit terms for suppliers and customers," he says. "One of the first things I do with clients is help them see where they could improve and find other ways to generate more cash internally."
A good example would be to ensure that you are eliminating work processes that add no value to the product or service and simplifying those processes that do. Lean manufacturing, for example, targets a number of sources of waste, including overproduction, defects, delivery delays, unnecessary inventory and the movement of goods, people or information.
"Ultimately, if you can find ways to run your company more efficiently, you can also make more profits and increase cash flow," he says.
Know your sales cycle
Keeping a vigilant eye on your sales cycle is another way to help manage your working capital. "You need to know if your sales cycle is similar from year-to-year and identify its highs and lows. If you know that you will be facing financial difficulties during certain periods, you may need to adjust your working capital accordingly," suggests Fry. "You need to know your main expenditures during a low season, and then try and keep your expenses down during that period." Fixed expenditures for most businesses include labour and equipment. "There are certain areas of your business where you'll always need an influx of cash."
Know the "quality of your receivables"
"Getting paid is not a sure bet today even though you may have outstanding payments from clients," emphasizes Fry. "You want to ensure that your customers have a good credit history and that they will respect your payment terms. Otherwise you may find yourself without cash when you need it," he says. Fry recommends that entrepreneurs clearly communicate their credit policy up front. "It's basically a set of rules to help you get paid as quickly as possible. Your clients need to know the maximum amount of credit you will grant them, payment terms (30, 45, 60 or 90 days) and deposit requirements. "Ask yourself: how much can I afford to lend my customers without draining my working capital?"
Collect payments faster
Collecting payments from customers faster is an obvious route to keeping more working capital in your company. Still, Fry believes it's important not to put your client rapport in jeopardy. "You need to keep your clients happy and attract sales, but at the same time, ensure that you're not footing the client bill too long," he says. To help protect yourself from late payments, he recommends billing as early as possible and making sure payment terms are clear. "You don't have to wait until the end of the month. That's a common fallacy. You need to generate an invoice as soon as the goods or services are delivered." For clients making large purchases, Fry suggests progressive invoicing.
Negotiate the best supplier terms
"Be sure that your suppliers are giving you the best possible deal and don't be afraid to negotiate," says Fry. It's important to shop around to get quotes from several suppliers. "Even if you're unable to get a better price, you can at least negotiate better payment terms so you're not draining your cash flow." Fry also recommends making payments to suppliers on time. "If you respect their terms, you're more likely to get their cooperation if you need to renegotiate payments when things are tougher," he adds.
Watch your inventory closely
It's also a good idea to assess your inventory turnover to determine which items are selling and which may be using up your working capital. "If you've got too much tied up in inventory, then you may be vulnerable. Be sure that, you can liquefy your inventory for cash when you need it." A rule of thumb is that once you see a trend or pattern in client orders, you can begin to stock inventory according to your needs. Do this just before you sell the inventory, so that the money you've invested comes back into the business as quickly as possible.
|
  
|
|
|
