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Text: How to optimise working capital

How to Manage Working Capital for SMEs

| Nalinee |

The ability to effectively manage working capital and cash flow is a crucial ingredient for any successful business.  In this article, we will go through top tips to help businesses better manage working capital and maintain control over its cash flow.

1. Manage working capital and forecast your cash flow

Businesses must bear in mind that revenue does not equate to cash in the bank.  Making a sale today does not mean you already have the cash in your pocket to pay your suppliers as you may still be waiting to get paid for your sale. Therefore, it is important to know your available cash flow and working capital over a specific period of time by conducting a cash flow forecast.  This is the heart and soul of managing working capital.

A cash flow forecast is simply a projection of future cash inflows and cash outflows. This helps your business identify any potential cash deficits in advance and be able to take appropriate action to resolve it. Check out some apps that can help with cash flow forecast and analysis here.

2. Extend credit terms with suppliers

To help preserve cash, you could consider delaying cash outflows by extending credit terms with suppliers.  This way, you have more time to pay your suppliers and can hold on to your cash longer to help meet other expenses.

3. Negotiate shorter credit terms with customers

According to the latest Atradius study, over 50% over Asia’s B2B businesses experience late payment from their customers.  This has a negative impact to cash flow as businesses have to wait longer before getting paid by their customers, but on the other hand will still need to pay creditors and meet expenses when they fall due. 

There are things you could do to get paid earlier to shore up your business cash flow.

  • Offer incentives or discounts for early payment.
  • Request for an upfront deposit to help bridge some of the cash outflows.
  • Renegotiate longer credit terms with your customers if and where possible. 

4. Ensure you invoice your customers as soon as possible

Without tight control around the invoicing process, your business may face long wait times to get paid by your customers or at worst, not get paid at all.  There are several apps out there that can help you better manage your invoice process. Read more in our recent article here.

5. Make it easy for your customers to pay you

You can make it easier for customers to pay you by offering multiple payment options, for example cheques, bank transfers and credit cards.  By making it as easy as possible for your customers to pay, you will more likely get paid faster.  In addition, PO numbers, invoice due dates, early payment incentives, payment instructions and contact details have to be stated on your invoices to help your customer.

6. Stay on top of accounts receivable

Frequently review your accounts receivable to monitor any upcoming and overdue payments as part of your company’s collection process.

It is also advisable to have regular conversations with your customers, especially closer to the invoice due date to ensure payments are made on time. If payments will be delayed, you can put in place plans to manage the cash inflow delay in advance.

7. Opt for an Invoice Finance facility

You may want to consider having access to external funding to support your business when the need arises.  Invoice finance allows your business to get an advance against your outstanding customers invoice as and when needed.  This way you will have full control over when invoices will be paid, thus allowing you to smoothen business cash flow.  Funds can be in your business bank account in as little as a few hours.

At InvoiceInterchange, you can unlock and access flexible funding with invoice finance. You decide which invoices to fund, with no need to commit your whole sales ledger. Our platform is also fully integrated with the Xero accounting platform, thereby allowing you to apply for finance and drawdown immediate funds with a few clicks of a button. 

8. Effective debt collection process

Ensure there is an effective debt collection process in place and also continuously look for ways to improve on the overall collection process itself. This includes:

  • Staying up to date with your customers’ billing preferences and procedures.
  • Adopt technology to support monitoring and reporting of any potential defaults.
  • Regularly review credit terms policy for your customers, adjust according to risk profile.

9. Improve productivity and efficiency

Within your business operations, the aim is to have work completed in the shortest amount of time. This means you free up more time to bring in more sales, increase revenue and contribute to increasing improving working capital management

10. Manage inventory effectively

For businesses that deal with physical goods, it is crucial to have good control over inventory management to help optimise cash flow.

This starts from the ability to accurately forecast future demand, to having a good working relationship with suppliers. This allows your business to minimise wastage or stock write-offs. Some suggestions to manage inventory effectively:

  • Order goods sufficiently to meet your sales requirements and forecast to minimise COGS expenses as well as logistics costs.
  • Store minimal goods in the warehouse to reduce storage expenses and potential expiration of goods.

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