How to improve your company’s working capital

Strengthening the working capital of your business

A healthy level of working capital allows your company to function effectively on a day-to-day basis, providing short-term liquidity and financial stability. It’s important to understand your current position, however – whether working capital is positive or negative.

To do this, you need to deduct your current liabilities from your current assets. Current liabilities are payments due within 12 months and typically include supplier payments and short-term borrowing. Current assets are used by the company or converted into cash within a year, for example, cash in the bank, debtor payments, and inventory.

If your working capital position is negative, we can help you make improvements so you’re operating at full financial capacity. Even if it’s positive, though, you can make changes that optimise and boost your company’s ability to grow further.

Boosting your business’s working capital

Lease hard assets, rather than buy

Leasing arrangements allow you to access expensive equipment, machinery, and vehicles whilst protecting your working capital by spreading the cost over a fixed period. Payments are also typically made at a fixed rate of interest, allowing you to budget with more certainty. Flexibility is built into the end of the lease and you can choose whether to continue using the asset, upgrade to a newer model, or hand the asset back.

Improve working capital by refinancing

If you already own valuable hard assets you can release their value by refinancing under a sale and leaseback arrangement. In this case, the financier buys the asset and leases it back to you with no break in your usage rights.

The cash lump sum generated from the sale boosts working capital, which is further stabilised by the fixed monthly lease payments. At the end of this arrangement, your company also regains ownership of the asset.

Optimise stock levels and consider inventory funding

Buying too much stock ties up working capital, and if it’s slow to sell, becomes a constant drain on your business finances. To optimise your stock levels take careful note of your quickest sellers and those that sell slowly, so you can order at the right pace.

Short-term stock financing also protects working capital and can be in the form of a secured or unsecured arrangement. This type of financing is repaid within 12 months and offers a quick way to improve working capital in your business.

Release the value held in your unpaid invoices

A business’s sales ledger is generally a high-value asset that can be used to improve working capital for the long term. You can unlock this value by negotiating an invoice finance arrangement with a specialist financier.

You quickly receive around 80-90% of the value of each eligible invoice, usually within 48 hours, which improves working capital levels throughout the month, as you’re not waiting the typical 30 days or more for payment.

Improve debtor and creditor days

Collecting your company’s debts efficiently reduces the number of days that you have to wait for payment, and can make a significant difference to the business’s short-term financial stability. In conjunction with this, negotiating more favourable, extended payment terms with suppliers also boosts working capital.

UK Business Finance can provide more advice on working capital management. Our services are free-of-charge and with such a wealth of experience within the team, we can help you to quickly improve your short-term financial stability. Please get in touch to find out more.