Understanding working capital to maintain business success

If cashflow is the lifeblood of your business, then working capital is the health check you should regularly undertake to keep your business alive. It is important for you to have an understanding of your working capital to maintain business success. Regularly checking working capital will play an essential part in maintaining business success during these times of greater economic insecurity.

What is working capital?

Working capital is your current assets minus your current liabilities and measures the surplus (or deficit) you have to keep your business afloat without needing to sell assets, borrow more, or add your own money into the business. The more working capital you have, the easier it is to fund growth or weather any downturns.

To calculate your working capital: Cash + debtors + stock + work in progress - creditors - taxes owing

For example, if your business had the following balances:

Cash $150,000
Debtors $120,000
Stock $100,000
Creditors $45,000
Taxes owing $25,000

Then your working capital would be $300,000 ($150,000 + $120,000 + $100,000 - $45,000 - $25,000).

If the business had an overdraft of $150,000 rather than a positive cash balance, the working capital would be zero. This means the business would have no cash to cover any slowdown in debtor payments or a downturn in sales (which would lead to higher stock levels). Worse, the business could be in serious trouble for trading while insolvent.

It’s likely your working capital has taken a hit due to Covid-19. Now is the time to review your processes and boost your working capital.

Consider the following strategies:

Build up enough cash to cover at least 2 months’ sales value

One of the key learnings from lockdown was how important it is for businesses to have enough cash in the bank to get them through a shutdown. Use the average sales value for the last six months to calculate the amount you’ll need, then manage your expenses to build your cash stocks up to this level.

Renegotiate your debt

If your business has an overdraft, could the core debt be negotiated into a term loan? Have you spoken to your bank manager about options for managing your debt as a result of Covid? We can work with you and your bank manager to determine your best finance options.

Negotiate with suppliers

Speak to your suppliers and see if you can negotiate better terms. This might be a discount for early payment or longer payment terms. They’ll be suffering too, so work together to come to the best arrangement for you both.

Set aside money for taxes

Calculate the percentage of sales you need to put aside for taxes and put this aside in a separate bank account so you have the cash to cover tax payments as they fall due.

Inject sufficient funds

If the above strategies don’t boost your working capital sufficiently, you’ll need to invest your own funds into your business to cover your working capital requirements.

Even with the many challenges of a post-pandemic economy, undertaking regular working capital checks is an effective way to help increase your business’s cashflow. We can help you calculate your working capital requirements and identify strategies you can implement to increase your working capital.

“Change is not a threat, it’s an opportunity. Survival is not the goal, transformative success is.” - Seth Godin

We can help. Talk to us about your working capital.

Your critical numbers

Establish your critical numbers; to improve the KPIs that have the biggest impact.

The Covid-19 crisis has created a “new normal” for businesses. Traditional ways of working are being challenged and we now need to innovate, adapt, re-engineer, and reinvent the way we work. Lockdown gave us time to consider our options, but two important questions often remain unanswered:

1. How will we know if we are on track or not?
2. Are our new plans actually working?

It goes without saying that our success needs to be measured. But it’s important for us to know what to measure. Your critical numbers are the levers that, if pulled, make the biggest impact to your results. Choose four or five critical numbers to measure. These may vary between businesses, for example, most businesses should know their minimum viable sales number per day or week for survival. Likewise, knowing the gross margin needed to cover your overhead costs and living expenses will be critical for many businesses.

Some tailored critical numbers might be:

Once we’re clear on the critical numbers we should be measuring, we need to establish how to measure them. Having real-time, cloud-based data is the new standard, so having the right software is important. The way you capture data may require additional planning. For example, you may need to make changes to your coding or reporting structure to measure your sales or margin by product type to assess the viability of different product lines. These changes will help to give you peace of mind and certainty that you’re on track. After all, you can’t manage what you don’t measure.

“Measurement is the first step that leads to control and eventually to improvement.” - James Harrington

We can help.  If you need help working out what your critical numbers are or how to measure them, talk to us.

How healthy is your working capital?

We all know that cash is king when it comes to business success, but what exactly is ‘working capital’ and how does this financial metric help measure the health of your business?

Working capital is made up of the cash and assets that are available in the business to fund your operations and keep you trading. It’s worked out by taking your current assets (the things you own) away from your current liabilities (the things you owe to other people).

So, why is working capital such a critical metric?

Having the liquid capital needed to trade

It’s possible for your business to be busy, successful and profitable, but for your cash position to still be in poor health – and that can have a serious impact.

If you can’t readily convert your assets into liquid cash, it’s a struggle to meet your cashflow goals, pay your bills and fund your day-to-day operations. But with the optimum level of working capital, you strengthen your balance sheet and put the company in a solid financial position.

To achieve this healthy level of working capital you will need to:

Proactively manage your cashflow

Cashflow feeds your working capital by pumping liquid cash into the company and keeping the balance between assets and liabilities in a strong position. But to achieve this, it’s vital to achieve a positive cashflow position, where your cash inflows are greater than your cash outflows. This means getting paid on time, lowering your outgoings and keeping a close eye on your ongoing cash position.

Monitor and forecast your financial position

Running regular financial reports helps you stay in control of your finances. With careful monitoring and forecasting of your cash position, you can ensure you don’t end up in a negative cashflow position, without the requisite working capital to trade and fund the next stage in your business plan. Cloud accounting software and business intelligence apps have made it easier than ever to create up-to-date, real-time reports and run dashboards that show your key metrics.

Use additional finance when required

If working capital is looking thin on the ground, then additional funding may be needed to bolster your balance sheet. Short-term finance options (such as overdraft extensions or invoice finance) and longer-term business loans can be needed to keep working capital on an equilibrium.

Working closely with your accountant is vital if you want to promote the ideal level of working capital in the business. We can help manage your cashflow, monitor your financial metrics and provide access to additional finance and funding when your capital needs a boost.

We can help. Talk to us about optimising your working capital.

Lessons learned in lockdown – for your business and life

Lockdown has been (and remains) a tough time for business.

Having to shut your business at short notice, or switch to an entirely digital, remote-working model, was a stressful experience. But there are things we have taken out of lockdown. Whether it enabled us to explore new ideas or dive into some fresh thinking regarding work, life or a business venture.

So, what lessons did we all learn from this enforced period of business shutdown, quarantine and remote working?

Carrying over the positives from lockdown

Suddenly, your office space lay empty, your employees were spread across various home locations and (crucially) your customer sales and revenue evaporated in the blink of an eye. The amazing thing about human resilience and ingenuity, however, is how quickly businesses DID evolve to cope with this situation.

Teams got used to home-working, video meetings and dealing with customers in the online space. And many of us began to see the positives of this low-impact, remote-working approach.

Are there things you can hang to now in the return to working life?

More time with family

With the daily commute no longer needed, and the ability to work remotely from our own homes, everyone had far more time to spend with their family, their partner or (via video calls) their wider circle of friends and family. Although enforced time together may have added a few strains, this extra time with our nearest and dearest is something we are grateful for – and should aim to continue.

More exercise and fitness time

finding the time to fit in a gym session or run was always tricky. The quieter pace meant that many could follow the latest workout video, go for a run, or get back on our bikes. We know exercise is good for both our physical AND our mental wellbeing - so it's important to keep this in your daily schedule going forward.

Future planning

working ON the business, rather than IN the business is an aspiration of any ambitious owner, but the time to do this is usually scarce. In lockdown, we’ve had far more time available to think through our core goals, what our next move should be and what our ‘post-coronvirus strategy’ should be.

Using data to understand your customers

Intuition is vital for business owners but if there’s data in your business that you haven't had the time to review, you may be missing opportunities. For some, lockdown provided some time for analysis such as, learning to use Google Analytics to understand how your customers find you, what your popular pages are, and which products are selling.

Getting in control of your financial model

 Huge drops in revenue have meant cashflow worries. We've been assisting clients to re-evaluate their financial model. Looking at costs, debts and potential revenue streams allows you see how you can reduce cash outflows and boost those all-important cash inflows. Reporting on these metrics will continue to support your business decisions.

None of us know exactly what the ‘new normal’ of business trading will look like. But if you want to be ready for a different kind of business reality, we can help. We’ll work with you to update your goals, strategy and financial model – so you’re ready for the future.

Talk to us. We are here to help.

6 secrets to getting prompt payment

If you’re struggling with late payments, and about half of small businesses are, here are some simple tips to try.

Invoice without delay

Your customer can't pay until you've invoiced them, so make sure you send you bill promptly. Customers are also more open to paying when they've just recieved the goods or services that you delivered. Cash in the goodwill, there's no reason to delay.

Include all the information

Make sure you invoice has all the right information, including a description of the work or product, the date it was ddelivered, and any customer requirements such as a purchase order number. Some customers have very specific requirements so ask what they need to see on the invoice. Make the due date clear too.

Ask for prompt payment

Customers used to get weeks to pay invoices, but that's changing. More than a third of businesses now request payment within a week. Consider doing the same. Starting off at seven days will help set an expectation of prompt payment. 

Be easy to pay

Customers will pay faster if they can use their prefferemd method to hand over the money. Consider whether you can offer them a variety of options, like a credit card or PayPal.

Chase payments

Your job's not done when the invoice goes out the door. You'll need to follow up with the customer to make sure it's being processed. If the invoice goes past due, it's time to make a phone call.

Talk to us about your invoicing system, we can help you get paid faster.

How to create a cash flow forecast for your business

A cash flow forecast is an important tool for business planning. And right now, understanding the cash coming in and going out of your business is vital.

A cash flow forecast will show you how long your business can continue to survive on current sales levels, by showing you how much money you’ll have in the bank at the end of a period.

It will give you an understanding of what the revenue drivers are in your business, and give you visibility of your expenses and the things you can control. Having this information in a forecast will also allow you to plan for different scenarios, work out your priorities and understand the outcomes of different options such as diversification.

A cash flow plan can give you a proactive tool to deal with uncertainty. If you are seeking funding in the form of a loan, applying for business support or just establishing your long term survival, you'll need a cash flow plan.

What information do you need?

We can help you to create a plan for your business. The plan is only as good as the data you have. So here’s what you’ll need to get started:

Understanding where your cash is coming from

Start with revenue from sales - break your sales figures up by product line and across channels. This will show you where the cash is coming from. For example:

• Does 80% of your revenue come from only 20% of your products?
• Do you sell to different markets and does one deliver more revenue than others?
• Are some of your products high value but low volume or low value at high volume?

The data you collect will enable you to ask questions, such as can you reduce margin to lift sales, can you push volume up or are there other channels to sell through?

Make sure you include all other revenue streams, such as grants, tax refunds or investment in your cash inflows.

Understanding expenses - where is the cash going to?

This will include all the costs associated with your business, including rent, wages, supply materials, bank loan fees and charges, tax bills, and electricity.

If you have a bank loan, include the details such as the length of the term and the monthly payments.

Your cash flow plan should also include tax payments when they are due and any capital expenditures.

Some of your variable expenses will directly relate to revenue such as freight or materials. When your sales stop, these will drop too, so your cash flow plan should reflect this relationship in order for you to scenario plan.

Controlling expenses - what costs are fixed and what are the variable costs that you can control? You may not be able to stop fixed expenses like rent, power and internet, but you could reduce the cash going out on petrol and travel, cleaning, and even directors' drawings.

Making informed decisions in your business

A good cash flow forecast will collate all the data from your business in one place. It will allow you to plan and work out how long your business can weather a storm. It will also help you make decisions around staffing, purchasing inventory, ordering supply materials or investing in growth.

It’s worth remembering that a cash flow plan is a different tool to a budget. Here’s one example: a budget will show sales but a cash flow plan will show the cash benefit of those sales. If you offer credit to customers, your sales may not result in immediate cash flow.

Want to get a handle on cash flow in your business?

If you’re not certain of how to get this information from your accounting software, talk to us about which reports to run. You may need a combination of accounting software reports and projected figures.

Use the information above to source the data you’ll need and get in touch. We can help you build a plan that gives you cash flow projections to assist your decision making.

Managing cashflow and accessing emergency funding

Working capital is a vital component of any successful trading business – providing the liquid cash needed for everyday operations. Suddenly finding your business without this cash can be a shock, but there are ways to fill these cashflow holes and get the company back on track.

In short, it comes down to careful cashflow management, and ensuring you have the best possible routes to additional finance and funding provision.

Key ways we can help include

Helping you understand your cash requirements

The starting point of any funding search will always be to understand what your current cash requirements are. This means sitting down to review your whole financial position. Then, armed with this information, we can see exactly how much you’ll need to borrow.

Liaising with banks and lenders

We can put you in touch with the most suitable banks, lenders and alternative funding providers, and can help in conversations with these lenders. For example, you may want to discuss the possibility of extending your overdraft facility, or whether you could temporarily suspend principal payments etc.

Preparing financial information for lenders

Any lender will want detailed financial reporting to back up your loan application. We can produce up-to-date accounts, cashflow statements and forecasts to help banks and finance providers understand your financial health and the risk levels involved in lending to your company.

Accessing government assistance

The Government is offering a variety of ways to support businesses financially during the coronavirus crisis. We can explain what loans, grants, tax reliefs or filing extensions may be available to you, and can help you fill out all the relevant forms and applications to make a claim.

Improving your debtor tracking

Outstanding customer invoices is another key area to get under control. We can help you understand your aged debt position, and identify which invoices you should be prioritising when it comes to chasing up customers and finding mutually agreeable payment terms.

Extending credit from suppliers

The coming months will be tough for many businesses, so it’s worth having open and honest communication with customers and suppliers around when payments will realistically be made. Agreeing on small discounts, part payments or extended terms will all help to increase liquidity for everyone.

It’s likely to be a rocky road for many businesses over the next few weeks and months. So, working together as a business community to support each other will be essential.

If you’d like to get in control of your cashflow management and funding needs, we’re here to help. We can help you crunch those cashflow numbers, access the best possible routes to funding and remove some of the worry during these testing times.

Talk to us about getting on top of cashflow.

Regain control of your business

Not all business owners want to grow their business. Some may just want more control. After all, your business is there to serve you; you shouldn’t be a slave to it. So, how do you regain that much needed control?

There are three essential tools all businesses must have:

1. An annual Business Plan.
2. An annual forecast.
3. Ongoing reporting and accountability.

The annual Business Plan​

Your Business Plan shouldn’t be a lengthy document living in a dusty drawer. It should be on one page and displayed somewhere highly visible so you can review it regularly.

Best developed using an independent facilitator, your Business Plan should articulate exactly what you want from your business; the hours you want to work, the holidays you want to take, and the income you need.

You’ll identify Key Performance Indicators (KPIs) to monitor, vulnerabilities to manage, and opportunities to act upon. You’ll set no more than four key goals for the year, breaking these down into quarterly goals with clear actions to complete in order to achieve them.

The annual forecast

Your forecast will record how cash must flow throughout the year to give you what you want from your business. Too often business owners only create a forecast because the bank has requested one.

The forecast will highlight your business's weaknesses, when cashflow problems might arise, and how you need to manage your business financially to achieve the goals in your Business Plan. Don’t wait for your bank to request a forecast; it’s an essential tool to ensure the success of your business every year.

Ongoing reporting and accountability

The value lies in the implementation of your Business Plan and annual forecast. Constantly reviewing your progress against your targets is crucial. Ongoing reporting allows you to track actual results against your forecast to ensure progress towards your goals.

The best way to ensure you don’t fail to implement the plan is to be held accountable by someone independent. Every business owner needs a coach. A great coach will work with you to get a result better than you could achieve on your own. They’ll uncover the root causes of problems in your business and empower you to do better. Most importantly, they’ll hold you accountable to getting the important stuff done.

There are no magic bullets to business success. All businesses need these three tools.

Get in touch to discuss how we can work together - to help you regain control of your business.

“Dreams x Goals x Plans x Actions = Your success” - Brad Sugars

Contact us here.

Have you got a strategy for a financially stress-free holiday period?

Christmas holiday breaks are a time to spend with family, friends & have a chance to recharge for the year ahead. We look forward to warmer weather and finally setting up an out-of-office email for the break. However, for business owners, this time can be stressful without careful cash-flow planning.

Even if you do continue to operate through the holiday shutdown season, your customers' financial behaviour may not remain the same.

It can be pretty disappointing to work hard all year only to find that once you have paid staff, overheads and creditors, you have little or nothing left in the bank to cover your own time off.

The strategies and tips shared below are generalised, however, we are here if you need to budget and prepare a cash-flow forecast. We can also help if you need assistance in applying for short term finance to get you through the break.

Why is cash-flow planning particularly important at this time of year?

Staff leave needs to be covered in addition to your normal fixed overheads like rent, creditors and tax compliance. The budget and forecasting process ensures you know your numbers and are prepared. If you are shutting down, you won't be driving revenue during this period and sales may take time to get started again in the new year.

Here are some simple strategies that can help:

Decide your Christmas and holiday break dates

Confirm these with staff, customers and suppliers.

Budget and plan for annual leave 

Remember the pay rates may be higher than standard hourly rates, also factor in statutory public holidays.

Decide

If you are going to pay out leave in full at the beginning of the Christmas break or continue to pay as usual throughout the break.

Review your work in progress (WIP)

Plan to complete jobs or services that can be invoiced and paid before Christmas (remember if you don’t invoice and get paid before Christmas, you may not see the money until mid to late January).

Capacity planning

There is often a rush to get everything done before Christmas, whether it's the kitchen benchtop installed or the beauty treatment before the break, so make sure you have the capacity to maximise on this.

Stock-take

Do you need to order in goods now to be able to complete work in progress? Check that there is stock on hand available.

Making an arrangement with the Tax Office

if you find you can not make payments, it is possible to apply for an instalment arrangement. There are costs associated with this, however it may provide a solution that gets you through the holiday period. Talk to us, we can help.

Talk to us about enhancing your financial support

If you can’t make ends meet, now is the time to organise short term financial relief like an arranged overdraft of loan, rather than hoping it will come right. Please let us know if you need any help with cash-flow forecasting, budgeting or finance applications.

Get in touch to improve your cash flow.