In the current climate, managing cash is the most important aspect of your business. The old adage “cash is king” was never truer than in the current climate. Yet most small business owners have focussed only on increasing profits over the last number of years. Now that sales have dried up, and profits are being squeezed, it is a good time to focus on other aspects of the cash flow of the business. If these are improved, then the profitability will follow.
There are a number of critical aspects to managing your working capital. Firstly, you must stay on top of the amounts owed to you by your customers, and have regular dialogue with each of them to ensure that you know their position and get paid on time. Bad debts not only impact on your profits, but also take up a lot of time; time which would be much better spent solving problems elsewhere in the business.
However, it is just as important to also speak to your suppliers about their payment terms. Failure to pay them on time can impact not just on your ongoing business relationships, but also on your gross margin from lost discounts.
The third area of working capital control is the stock level. It is important to consider the trade off between volume purchasing, and the cost of holding the stock. The more stock you hold, the greater the risk of obsolescence or damage. Stock levels should be monitored regularly, and any slow moving or damaged stock should be removed, and discontinued. Also, you should consider the number of product lines being stocked; are 5 different lines required when 3 would do? Decisions on seasonal stock levels need to be carefully considered also.