Every business has a working capital cycle. This is the time it takes for your business to turn net current assets into available cash.
The longer the working capital cycle, the more time it takes for your business to get a robust cash flow. It’s good practice for businesses to manage their cycle by looking at each step where possible. This could be by selling stock or product quicker, collecting monies owed sooner and possibly paying bills later on.
Factors will vary between industries, but essentially how long it takes you to sell your stock / product and how long it is before you get paid will impact the length of the working capital cycle for your business.
For example, a manufacturing company purchases raw materials on 60 days credit from a supplier for a product which they expect to sell in two months’ time to a client. Payment from the client, however, may not be made immediately – say, not for another 30 days – and the manufacturer still needs to pay the supplier before their credit payment terms of 60 days are up.
It is of course quite normal for businesses to be in a positive working capital cycle and have a period of time where there is a gap in available cash. If this is the case, it is still very possible to continue to grow your business.
As mentioned above, there are ways to handle each step of the cycle to maximise your cash flow as much as you can. And in theory they’re simple: reduce stock days, reduce the time taken to get paid and increase creditor payment days:
- Firstly, get stock / product sold as soon as you can and shorten the length of time you hold it. This will also help you avoid stockpiling or carrying obsolete stock and might even save you some money on storage costs.
- To reduce your receivables days, invoice management could be a solution. Shorten your invoice terms, offer early payment discounts, and / or improve your credit collection process. A widely used method for invoice management is invoice finance to accelerate the revenue you’re due within a few days of the invoices being raised.
- Probably the most challenging step of the cycle is to change lengthened credit terms with your suppliers.
If you would like help in plugging the gap in your businesses cashflow, our Banking & Finance team within Streets Financial Consulting are on hand. Many businesses use forms of finance such as invoice finance, working capital loans, revolving credit facilities and tax funding solutions (for corporation tax and VAT). Our team has access to a panel of over 50 funders to introduce you to.
For further information please contact Martyn Shakespear, Head of Banking & Finance, by emailing mshakespear@streetsfc.com or Tina Hayes, Associate Director, at thayes@streetsfc.com
