By Simon Peskett, Assurance and Business Services Associate Director at Smith & Williamson

In a fluctuating economy, it’s business-critical to understand your working capital cycle and to manage the funding gap between securing those all-important orders and cash arriving in your bank account.

In addition, previous recessions have taught us that more businesses collapse as the economy returns to growth, rather than in a downturn.

Here are some procedures you can introduce to shorten the working capital cycle and reduce your funding requirement from lenders and investors.

Manage customer expectations

Where appropriate, provide quotes and agree payment schedules. If you have to make significant outlays to suppliers prior to your goods or services being provided to a customer, ask for payments up front and/or negotiate payment plans with suppliers to improve your cash flow.

Give early warnings about price changes

Advising customers of forthcoming price changes reduces the possibility of disputes arising before any significant costs are incurred. Where it’s necessary to charge amounts in excess of previously agreed prices, invoicing these amounts separately can ensure that agreed charges are not withheld in any subsequent dispute.

Review customer credit limits regularly

Design and implement procedures to ensure that credit limits are set and not exceeded to reduce your potential bad debt exposure.

Take debt collection seriously

Separating and empowering your debt collection function will lead to better cash collection, while allowing salesmen and business winners to maintain their customer relationships.

Know your customers

Understand the payment processes of your significant customers and ensure that invoices are sent in good time. Build relationships with payment teams to help you get your invoices paid.

…and talk to your bank

It’s important to keep in regular contact with your bank or other lenders. Many finance providers offer bespoke products that help customers match their funding requirements to the needs of the working capital cycle and also to mitigate any currency risk. Each has its benefits and disadvantages, but using the right financial product can reduce stress and help increase the financial headroom in your business.

There is no substitute for good financial management. Detailed cash flow forecasts and sensitivity analysis are imperative to understand how your working capital requirement will fluctuate in different ‘what if?’ scenarios.

To find out more about streamlining your working capital requirements, call Simon Peskett on 020 7131 8449 or email simon.peskett@smith.williamson.co.uk

By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.

Smith & Williamson LLP
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.