By Michael Jjingo
Working capital is the lifeblood of any business! As we define capital, we should note that it is derived from the Latin word, “caput” that stands for head or top.
No wonder, it is not about academic status or excellence to run a successful business, but the business acumen and prowess. Careful cash management is particularly crucial to every business. Certainly, it’s no amplification to say that it can make the difference between success and insolvency.
But what exactly is working capital?
In simple terms, this is the difference between a business’s short-term assets and short-term liabilities. Put another way, working capital represents the difference between what the firm owes and what it owns.
Without sufficient working capital, a business simply won’t have the cash it needs to fund daily operations and future growth.
At first glance, this suggestion may appear strange: surely paying your suppliers as late as possible will improve a company’s working capital!
However, suppliers who are paid quickly and who do not have to waste time chasing invoices are likely to be more flexible when it comes to prices and credit days. Effective negotiation is essential to any business.
In any business, it can be tempting to disregard smaller expenses. This is extremely unwise, as they can accumulate to substantially effect on the business’s working capital.
Setting clearly understood rules for expenditures can make the difference, while regular review of expenses in depth and quickly takes remedial action where employees are bending the rules.
True, choosing suppliers with longer payment terms can represent a huge boost to your working capital, so it is worth carefully examining the detail and negotiating wherever possible.
E-procurement also involves a rigorous authorization process, which can assist in reducing unexpected expenditures and protecting your working capital.
Bank borrowings and overdrafts can be a good way to manage shortfalls in the working capital. However, temporary overdrafts represent a moderately high risk for the bank, and may attract higher interest rates.
Please negotiate for better terms, which can offer you a cash-flow boost.
Invoice factoring or discounting enables you to borrow up to around 85 percent of the value of your invoices as soon as you raise them.
You then repay the advance, as well as interest and charges, once your client has paid you. As for factoring, the bank takes ownership of your debtor and deals with recovery. Their expertise will probably mean faster payments and hence lower interest charges.
Accounts receivable is one of the prime assets on any balance sheet, which should be aptly managed. To enhance it, consider working out your probability of repayment by the debtors, by monitoring their bill of business health.
Supply chains and inventory are a key asset in almost every industry except the service sector. Remember, if you plan to move the needle faster, it’s best to start with the large items.
Pareto analysis (80/20 rule) is a very effective tool here to avoid excess, obsolete and expiring stock, or short stock levels. Renting out or selling the unused spaces can help generate cash for a company,
In summary, maintaining sufficient working capital is crucial. Make the right decisions and you will have the cash on hand to pay your staff and suppliers, take on additional orders and new clients, and most importantly invest in the future growth of your business.
This is particularly true for SMEs and startups in the most competitive, but lucrative sectors, where effective financial control is vital to keep business afloat
The writer is the General Manager- Commercial Banking at Centenary Bank