Unlocking Working Capital: 8 Tips For Sustaining and Growing Your Business

Mar 07, 2024 5 Min Read

Photo by macrovector_official @ freepik

Always carefully balance risk and reward when unlocking capital!

Maintaining positive cash flow is vital for any company's survival and growth. Even profitable businesses can fail due to working capital shortfalls, which can prevent timely payment of bills and staff salaries. To preserve operations and fund expansion, consider proactively managing your working capital through smart strategies. 

Read more: 5 Keys to Managing Your Cash Flow So You Don’t “Grow Broke”

Here are some effective cash flow management techniques to help your business ensure financial stability and create a solid foundation for future growth.

(1) Optimise Invoice Timelines

The speed at which customers pay outstanding invoices has a significant impact on working capital. By streamlining your billing processes, you can shorten the cash conversion cycle from the point of sale to the receipt of payment, effectively unlocking business working capital.

First, ensure that invoices are accurate and dispatched promptly after service delivery. For larger customers, consider consolidating billing cycles through automation. It's imperative to clarify payment terms upfront—ideally 15 days, though 30 days is often standard.

Establishing procedures for politely following up on late payments within agreed terms can also help. Where possible, incentivise prepayments or offer discounts for prompt payment. This requires consistent monitoring of accounts receivable to accelerate collections and improve cash flow.

(2) Renegotiate Payment Terms With Vendors

Timely payment of bills is essential for positive cash flow. Just as you promptly invoice customers, vendors expect the same from you. The longer you can defer paying your own bills while maintaining cash on hand, the better off your working capital will be.

Partnership concept illustration

Review contracts with key suppliers to see if it's possible to extend payment terms from 30 to 45 or even 60 days. By consolidating smaller invoices into fewer, larger monthly payments, you'll gain a financial 'float' that can significantly enhance your working capital position.

While maintaining healthy vendor relationships is important, renegotiating payment terms can provide a much-needed injection of liquidity. Use this freed-up cash to address immediate business needs, reinforcing the foundation of your operations.

(3) Carefully Manage Inventory Levels

For companies dealing in physical products, inventory often represents the largest capital commitment on the balance sheet. Holding too much stock can immobilise crucial funds, while too little can lead to missed sales opportunities.

Regular analysis of sales forecasts, historical trends, production constraints, and inventory turnover ratios can help determine the optimal balance between supply and demand. 

This may interest you: The Role of SAP Business One in Supply Chain Management for SMBs

Furthermore, implementing strategies such as just-in-time manufacturing, consignment agreements, or drop-shipping can significantly reduce the capital tied up in inventory, freeing up resources for other areas of your business.

(4) Secure A Business Line Of Credit

A business line of credit (LOC) is essential for managing cash flow and ensuring financial stability. It allows businesses to cover short-term needs without tapping into cash reserves. This approach is beneficial for capital raising for restaurants, enabling them to handle seasonal fluctuations and maintain operations during slower periods.

Before financial challenges arise, establishing a line of credit is a smart move for any business. It provides a buffer against unexpected expenses and supports continuous operation, especially for industries where cash flow can be unpredictable.

Tiny people with credit report

Businesses should use their line of credit wisely, drawing on it as necessary and repaying quickly when possible. This discipline helps maintain the credit line for future use, aiding in the financial health and growth of the business. 

(5) Offer Customer Financing

Some clients experience sticker shock when faced with large upfront payments. To address this, consider extending financing options for their purchases. Not only does this improve their cash flow, but it also sustains yours. 

Options such as instalment plans, leasing arrangements, or deferred payments can make your products or services more accessible, potentially increasing sales and market share. Implementing reasonable financing terms fosters customer loyalty and encourages repeat business from clients who appreciate the added financial flexibility.

While these financing options enhance your business's cash flow, consider the costs involved, such as interest rates and administrative fees. Additionally, managing associated risks is crucial. For instance, you need to qualify customers carefully and require deposits for high-risk accounts to reduce potential losses. Striking the right balance ensures both customer satisfaction and financial stability.

(6) Leverage Supplier Rebates

Many suppliers offer rebates or cash-back incentives when purchasing volumes reach certain tiered thresholds annually. These rebates are often structured as lump-sum payouts on specific dates, providing scheduled working capital injections.

Instead of spreading purchases evenly throughout the year, you can combine them during peak sales seasons. By hitting higher rebate levels, you maximise the cash-back benefit. As a result, your working capital receives a boost precisely when you need it most—during busy periods.

Revenue agency abstract concept illustration

Moreover, incorporate rebate timing into your cashflow forecasts and budget planning. Knowing when to expect these periodic payouts allows you to manage cash crunches effectively. Consequently, your financial planning becomes more accurate, and you can allocate resources wisely.

(7) Accelerate Asset Depreciation

Depreciating fixed assets, such as equipment and vehicles, generates paper expenses that reduce taxable income annually. However, non-cash deductions don't directly improve working capital unless channeled strategically.

To optimise this process, consider utilising allowable accelerated depreciation methods. By frontloading deductions into earlier tax years, you can maximise near-term taxable income reductions, resulting in higher tax refunds. These refund injections provide additional working capital upon filing.

Additionally, developing depreciation forecasts helps project future cash flow impacts. Accelerated schedules yield larger initial refunds, followed by lower deductions in later years as assets fully depreciate.

(8) Consider Asset-Based Lending

For manufacturing or product companies with substantial inventory, equipment, and accounts receivable, asset-based lending (ABL) offers a solution to unlock capital tied up in these assets.

ABL credit lines typically have higher borrowing capacities compared to traditional bank loans because they're secured by assets acting as collateral. Lenders provide capital based on a percentage of current asset values, which is then repaid through revenue generation.

Unlike short-term asset liquidation, ABL allows you to retain tangible assets while accessing their liquidity without disrupting day-to-day operations. It provides ongoing working capital that can be scaled with your business growth.

The Bottom Line

Maintaining sufficient cash reserves is crucial for operational stability and funding growth initiatives. Practicing disciplined working capital management through optimised billing, strategic financing, supplier negotiations, smart depreciation, and asset utilisation can contribute to your long-term success. However, always carefully balance risk and reward when unlocking capital.

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Holly Harvey is a seasoned entrepreneur with over 15 years of experience in financial management and business operations. She has successfully guided numerous startups in identifying opportunities for sustainable growth. Outside of work, Holly enjoys exploring new hiking trails with her dog, Max.



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