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Putting capital to work

Some businesses (particularly those that operate largely or exclusively online) have managed to trade as normal during the Coronavirus crisis. Unfortunately, most small enterprises don’t fall into that category and therefore need to do whatever they can to minimise the gap between assets and liabilities. The scale of the challenge can be seen in the difficulties faced by business dealing with unpredictable receivables from customers seeking to delay expenditure as they face their own cash flow issues. One of the main lessons of the Coronavirus crisis for financial controllers is that foresight is crucial to ensuring the survival of any business at any time and even more so during extremely difficult trading conditions.

Regular review required
One of the most useful steps a small business can take to maximise its working capital position is review existing facilities on a regular basis and explore options such as sale and leaseback, where an asset owned by the business is sold to someone else and then leased back to the business. Reviewing bank facilities is an exercise that might be undertaken only when a large customer deal is secured or a business plans to change bank, but in most cases it should be done more often. These reviews will usually confirm that the current arrangement is the most cost-effective, but potential savings made could make the difference between having to lay off employees and retaining valuable members of staff.

Don’t sell yourself short
As we have discussed in a previous blog, offering customers discounts for early payment of invoices is an option for improving a business’s working capital position and can be particularly appealing to relatively new enterprises where cash flow is slow. However, most customers will demand a reduction of at least 10% in the amount due, which can have a knock-on effect on the accuracy of financial forecasts and revenue projections. Small businesses need to be smart about how they manage payments. Regular late payers may try and use this as an excuse for demanding discounts for merely settling invoices on time, while some customers may demand ever greater discounts and assume the business would be unwilling to refuse for fear of losing their business.

Take a smart approach to payments
The old adage that ‘cash is king’ is especially true during times of uncertainty. Over the last 12 months, releasing trapped working capital has been a top priority for businesses unable to sell products and collect receivables in the same way they would have done prior to the pandemic. One option when money is tight is to categorise suppliers in order of importance and prioritise payments to the most important – those without whom the business would not be able to continue to trade.

Among the many benefits of using a cloud-based accounting solution such as Big Red Cloud is that it streamlines the management of receivables and payables. By focusing on a single solution and moving away from inefficient spreadsheets, businesses can simplify their working capital management.