One of the keys is effective working capital management. Put simply, working capital is the net amount of liquid assets at the business's disposal - debtors, stock, and cash, less short-term liabilities like trade creditors and taxes. It's a measure of the business's overall liquidity, efficiency and financial health. And managing this effectively is key to improving a business's ability to grow, without recourse to more expensive, external sources of finance.
There is sometimes scope for the small business to improve its working capital position through quite simple and inexpensive measures. Occasionally, the results can even be dramatic. Here are my top tips for effective working capital management:
- Make sure you get paid on time, every time. Assess the credit risks that come with new customers. Be clear about your payment terms. Consider if your terms could be improved; could customers pay up front? Monitor your debtors; chase the late payers; have a system to escalate in cases of persistent non-payment.
- Don't overstock. Money tied up in stock cannot be put to use elsewhere. Manage your stock levels; understand what's shifting and what isn't; manage your supply chain and apply 'just in time' principles.
- Make sure money in the business is working hard for you. If your business has excessive funds in the bank earning very little return, ask if this is the best use of the money. Could it be invested elsewhere for a better return?
- Negotiate better credit terms with your suppliers; and take advantage of the terms you agree. If you pay your suppliers on presentation of invoice, but your customers take 60 days to pay you... there may be a problem.
- Negotiate favourable terms for your bank credit facility. If your business does require an overdraft to support its working capital requirements, make sure you aren't paying over the odds.
In a world where many small businesses are still struggling to get the finance they need to grow, it's essential to explore all the options. Working capital management - getting one's own house in order - is a great place to start. Charity, as they say, begins at home.