One benefit of both reviewing your historical cash flow patterns, as well as creating a cash flow forecast, is being able to make changes that will maximise your working capital.

Working capital is the money you have available to operate your business from day to day.

In business, working capital is made up of three key components:

  • Payment to suppliers (creditors)
  • Work in progress
  • Collection from customers (debtors)

How much working capital you have at any one time is dependent on the length of time between you using your cash to purchase materials and pay your labour, and receiving payment for completing a job.

Clearly, there will always be a delay between these two steps. Problems arise when you are unable to meet your financial obligations because you are still waiting for payment.

When you are working on a project that is larger than usual, and you know there will be a substantial delay before you finally get paid, you will need to plan for that by ensuring you have a larger amount of working capital on hand to tide you over. By contrast, for smaller jobs where turnaround time is quite short, your working capital requirements will be minimal and your cash position will be relatively unaffected.

The real issues occur when delays are unexpected. For example, you may be doing a small renovation for a client and, while you have quoted the job and know how long it will take to complete, there is no way to be sure that the client will pay for it on time. Depending on the size of that job, you may wish to demand an upfront payment to cover the materials you need to pay for before commencing the job.

The key to successful cash management is carefully watching all the steps in the process and planning accordingly. The quicker you can make the cycle turn, the faster you can convert your trading operations back into cash, which means you will have increased liquidity in your business and will be less reliant on cash or extended trading terms from your suppliers.

Fortunately, you can manage your payments to suppliers, your work in progress and your debtors to improve your cash flow.

If you need some assistance, please contact us as we’d be more than happy to help.

You will see the impact these changes have on your profit margin, your asset turnover and ultimately your return on assets.

Now you’re starting to really see where your business is financially and what you need to do to get you to where you want to be.

Are you in need of sound business advice? Do you clearly understand working capital? Contact us for a free 30 min strategy consultation. Click here to get started

Let us review your business and funding requirements to help you grow your business and achieve your business goals – big and small.

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