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How to boost cash flow and increase working capital

2020 has been something of a challenge to say the least, thanks to COVID-19 affecting businesses around the world. And, if that wasn’t enough, we’re also having to contend with Brexit!  Right now, having enough readily available money is essential to keeping your business afloat.

Here at North Star Accounting, we’re committed to helping you manage your cash flow and working capital ready for growth in 2021.  In our latest video, we’re outlining our top tips for a (hopefully!) prosperous new year and new Brexit era.  Take a look at the video below or scroll down to understand the key points...

 

What’s the difference between cash flow and working capital?

Cash flow

Cash flow refers to the money that flows in and out of your business.  A positive cash flow means you have more money coming in than out over a period of time.  

You can improve cash flow in a number of ways: 

  • Increasing sales
  • Reducing expenses and overheads 
  • Selling an asset  
  • Collecting payments from customers more quickly 
  • Delaying supplier payments  

Most businesses will carry out a mix of the above to create a positive cash flow.  

Working capital

Working capital refers to liquid assets that your business has to hand. In other words, assets that can be readily converted into cash if required.    

In accounting, you calculate working capital by deducting the liabilities – that is, money that the business owes – from its assets. If the result is negative, this indicates that your business may not be able to honour its short-term finan

cial obligations, and that your working capital isn’t adequate.  

Your working capital is increased by either increasing profit, an injection of cash from shareholders, or by taking a loan.  

Cash flow and working capital are similar, but different. If a business has either insufficient cash flow or inadequate working capital, it’s likely to be a sign of trouble!

Tips for improving cash flow and working capital

 

1. Monitor your cash flow 

You should be doing this daily or at least once a week. Online accounting software such as  Quickbooks, FreeAgent or Xero are really helpful and allow you to track invoices, chase payments and pay bills.

2. Review expenses and overheads

You should make sure you’ve reduced expenses as much as possible, and that you’re on the best tariffs for your business when it comes to the likes of banking, foreign exchange costs, utilities, insurance and Broadband. This may not always be the cheapest option, but it should provide the best value

3. Negotiate with suppliers 

You might be able to agree on longer payment terms for a particularly large order or line of credit.  

4. Sell unused assets

If you have  equipment that you no longer use, or stock or inventory that’s about to become obsolete, sell it!  Cash it in while you can.    

5. Lease instead of buying

 If you need anything new, such as computers or production equipment, lease them instead of buying them. Most lease costs incurred by small businesses can be expensed, and if you’re renewing with the same provider, you may be able to get better terms. 

6. Speed up payments

You can promote early payment of invoices a variety of ways.  Always email invoices to customers rather than posting them if possible.    Copy in at least one person to ensure receipt and response.

You could offer an early payment discount, but do you your sums first to make sure the discount isn’t too much and doesn’t cost you money in the long run!  

If you are providing a service such as a training course, ensure you have payment upfront or at a minimum take a mobile payment processor with you.  Don’t leave without payment!  Take a look at IZettle or Square payment processors.

7. Take advantage of Time-to-Pay

HMRC’s Time-To-Pay arrangement is currently available due to Coronavirus. It helps you spread your tax liabilities over a longer period of time. HMRC interest rates are currently only  2.6%, which is lower than most commercially available loans.  

8. Get a credit card

Take out a business credit card and have an overdraft in place in case you need it. 

9. Put spare cash to work

If you’re in the fortunate position of having cash balances sat in the bank, could they be put to work for you? Interest rates are low at the moment, so cash sat in the bank may not earning anything for you all. Look for opportunities here.  

That said, be sure to keep enough working capital in case of any unexpected events. We’d recommend at least 3 months’ outgoings as cash reserves in the company to provide a safety cushion. 

9. Explore other financing options 

There are numerous financing options available to you, here are just some of them: 

  • Consider invoice factoring, where you borrow money against unpaid invoices  
  • Explore asset refinance, where you sell and lease back your equipment
  • Access trade finance if you’re dealing with international buyers and suppliers
  • Look into a Tax Credit Loan if you have outstanding R&D (Research and Development) tax credits owed to you that HMRC are being slow to process 

 10.  Talk to both your customers and suppliers

Talk to both your customers and suppliers to find out how they’re managing cash flow during Covid-19 and Brexit, and to understand its impact on them. You may be able to help each other.    Remember, we’re all in this together!

All in all, there are steps you can take to future-proof your business in these lean times.    We recommend you make some time to appraise your own business, and objectively look for opportunities to improve your cash flow soon. 

For more advice and information, get in touch with the team at North Star Accounting.