Working capital management overview

  Added:  01/09/2018

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How to improve your working capital position

1. Begin with a review

Effective management of working capital should begin with a review of your cash management processes, practices and systems. Take a thorough look at how you are working today and how you compare with your competitors. For companies with a turnover above £3m, our Working Capital Tool can assess your current position and benchmark you against your peers. Once you know your weaknesses, you can make improvements in areas such as invoicing, tracking late payments, stock control, and extending your own payment terms.

2. Accelerate cash conversion

How long does it take your business to generate cash? A lengthy cash conversion cycle – i.e., the time between purchasing inventory through to receiving payment from sales – can starve a business of cash. The quicker you are paid, the better your cash flow. Focus on bringing cash back into the business as quickly as possible by automating and accelerating the cycle, raising and sending invoices in a timely fashion and collecting outstanding sums efficiently.

3. Monitor suppliers

Reviewing your suppliers can help you check that they’re delivering value for money and that their payment terms are in line with your cash conversion cycle needs. For example, if payments to suppliers are due before you receive payment from your customers, it will impact your working capital cycle. Discounts for early payment may sound tempting, but if they mean you’re exceeding your overdraft each month, they may be costing you. Reviewing contract terms is also important, particularly if you’re tied to fixed supply quotas but customer demand varies, otherwise you’ll be paying for stock to sit around.

4. Reinvigorate your processes

Make the cash in your business work harder by tightening up processes for both income and expenditure. For example, review your procurement processes to make sure you benefit from potential discounts, and take a look at your stock levels to spot slow-moving or obsolete items that could be removed from your product line. Forecasting demand can help ensure orders are fulfilled on time but excessive stock holding is avoided. You may also want to consider whether alternative stock and production methods, such as just-in-time processing, could work for your business.

5. Evaluate your sales strategy

Maximising sales and boosting add-on sales to existing and potential customers can improve your cash position, as long as you’re balancing that against the increased costs of servicing those sales and making sure you’re paid on time. A clear pricing strategy that’s regularly reviewed can also be effective, particularly if products are proving hard to shift, or where you’re attempting to gain competitive advantage, or corner a market. The key is to keep cash flowing through your business.

6. Understand new markets

Global trading conditions and payment terms vary widely and can increase your cash conversion cycle. For any company trading internationally, it’s vital to understand different payment cultures and work practices. Lloyds Bank is holding trade fairs to highlight the issues, and our International Trade Portal provides a comprehensive overview of trading risks. Financial benchmarking will help to identify opportunities, and digital tools such as data-driven diagnostics can improve working capital processes.

7. Manage your cash

Effective cash management can help your money work harder. A blend of instant access and fixed term deposits means you can optimise returns and cash availability. Understanding where you have excess cash that can be put to use is important in making your cash work harder, earn the best returns possible and help you achieve your short and longer-term plans.

Why not take a look at our range of solutions that can help you manage your working capital more effectively?

Talk to your relationship manager about how we can help you unlock up to 5% of your turnover through management of your working capital.

Get in touch.

How could releasing 5% of your turnover as cash help your business?

While all reasonable care has been taken to ensure that the information provided is correct, no liability is accepted by Lloyds Bank for any loss or damage caused to any person relying on any statement or omission. This is for information only and should not be relied upon as offering advice for any set of circumstances. Specific advice should always be sought in each instance.

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While all reasonable care has been taken to ensure that the information provided is correct, no liability is accepted by Lloyds Bank for any loss or damage caused to any person relying on any statement or omission. This is for information only and should not be relied upon as offering advice for any set of circumstances. Specific advice should always be sought in each instance.