Working Capital Management: Free Up Cash in Your Business

Let’s face it – in small business, cash is king. Cash flow allows you to meet payroll, buy inventory, pay down debt and grow your business. In the heat of running a business, it’s easy to focus on revenue growth (not that that’s a bad thing!) and allow significant pockets of cash to lie idle in your business. What are the main sources of this untapped cash?  It’s your working capital accounts: customer accounts receivable, inventories, trade payables and lines of credit.

Here are five techniques you can use to access cash in your business. Some of these are temporary in nature; others are longer term. Some of these might sound obvious, but they are worth revisiting when complacency sets in (and yes, it does – even in your business!).

1. Stay on top of your receivables.  Be obsessive about accounts receivable management. Watch your aging, and pay attention to slippage into a different aging category. Time and time again, I’ve seen small problems turn into big problems. Take early action, get on the phone and “dial for dollars.” If your A/R staff have concerns about collectibility, create a safe environment for them to accelerate the issue for a higher level communication between your company and the customer.
2. Manage your inventories.  Match inventory purchases with sales forecasts, and maintain a safety stock for items with long lead-times. Analyze items that are moving slowly, and consider eliminating some SKUs. If you have a major supplier of high dollar inventory, request them to maintain a dedicated stock of inventory at their facility (sometimes called Vendor-Managed Inventory, or VMI). This will allow you to pull inventory as needed and avoid tying up working capital. If you have excess or slow moving inventory, hold the business equivalent of a garage sale and convert it into cash.
3. Renegotiate your revolving credit line.  If you have a seasonal or one-time need for additional credit, approach your lender for a temporary increase in your credit line.  Lenders are more receptive if the increase is tied to a major new customer relationship, product line rollout or other promising business activity.  Explain how much you’ll need, when you will need it and when you will pay it back.
4. Pay suppliers with a corporate accounts payable card.  Some suppliers won’t allow this (due to processing fees on their end), but many are becoming accustomed to it. For you, this can provide additional accounts payable “float” (depending upon purchase timing and billing cutoff cycles) and you can earn rewards points or rebates that you can use for travel, office equipment and employee incentives.
5. Restructure accounts payable terms.  If your business is growing and you find yourself in a cash crunch, consider contacting your major suppliers and asking for longer payment terms. Depending on your relationship with the supplier, this could be a temporary extension or perhaps even a permanent extension. For example, if you have brought on several large customers that pay you in 60 to 90 days, you might need to approach your larger suppliers and ask for 60 to 90 day payment terms. If you clearly outline the need and a specific payment plan, you might be surprised at your suppliers’ receptiveness. [As an aside, cash flow allowing, always try to take advantage of early payment discounts offered by suppliers.  See this post for an explanation of the cost of discounts not taken.]

The above items are not all-inclusive, and your organization may have additional opportunities for working capital management. What’s most important is for you to have a rigorous process for regularly monitoring your working capital accounts and harvesting cash. Take action on this today – the longer it sits idle, the harder it is to access!