Why managing working capital is so important

Okay, this may seem like a stupid question to a lot of people but please bear with us as all will become clear. Do you know what working capital is? Yes...No…Unsure? Well, allow us to elaborate a little. In a nutshell: Working capital is the funds that are available to cover day-to-day operational expenses, and as maintaining a healthy cash flow is essential for the survival and growth of any venture, effective management of this particular piece of the financial puzzle must not be ignored. This article will explore this subject and highlight some useful points on how to manage your way around everything.

Understanding working capital

When you’re running a business, working capital is the amount of cash and other current assets a company has available after all its current liabilities are accounted for. What are current assets and liabilities? Current assets are items that are either actual money or can be converted into cash quickly, usually within one year – they include cash in current and savings accounts, stock, prepayments and petty cash. Current liabilities is money a business owes. For example, it could be for rent/utilities, accrued expenses and income taxes. In order to calculate your working capital, all you have to do is subtract your total current liabilities from your current assets.

As you can see, understanding working capital is crucial for keeping a business running smoothly because you need sufficient funds to fulfil financial obligations; probably the two most notable being wages and suppliers.

Managing your working capital

To help keep you on track and with your working capital, you could try the following:

• Effective debt management; while some level of debt can be useful for growth, it's important to manage it wisely. Focus on paying off high-interest debts first and consider refinancing options to lower interest costs.

• Cut down on expenses; trim unnecessary expenses to minimise cash outflows. For example, you could reduce travel costs by holding virtual meetings.

• Negotiate supplier terms; collaborate closely with suppliers to negotiate favourable payment terms. Extending payment periods while maintaining good relationships can help free up working capital. Consider exploring early payment discounts as well.

• External funding; looking at extra cash from somewhere can be considered for growing your working capital. However, always do your research first and try and get some independent advice.
Options available include working capital loans, overdrafts and asset-based lending.
 

For more details…

If you want to understand more about working capital, head to https://www.british-business-bank.co.uk/finance-hub/working-capital-finance-options/.

For all other business finance advice and support, check out the HotSW Growth Hub – covering all sectors in the Somerset and Devon region. https://www.heartofswgrowthhub.co.uk/.

Can you think of other effective strategies for managing working capital? Answer in the comments!