Insights

How to Make Working Capital Work for Your Business


Don’t discount the one available form of capital that’s right under your nose: your own working capital.

Capital is scarce for Australian businesses, with no sign of improvement on the short-term horizon.

Raising traditional bank debt to finance business growth, acquisitions or succession planning has become incredibly challenging.

Even some of the more risk taking, high net worth investors are becoming so cautious it’s difficult to get them to invest in very worthy SMEs.

But there is a capital strategy SMEs can use now, to position their business for the upswing that will (eventually) come.

It may not be the sexiest of capital strategies, but it’s important not to disregard the least expensive type: your own working capital.

Businesses that survive a recession are those who’ve kept a close eye on working capital. They are considerably more robust and consequently more valuable when the economic pendulum swings back to “good times”.

It’s because these businesses, to survive, have had to really understand their cost base and product lines, and work extremely hard to get cash flow under control.

Really understanding your product gross margins and assessing the overheads it takes to deliver profitability is an extremely worthwhile use of your time in “hard times”.

It’s certainly a less risky option than to struggle on, waiting for the economic or business horizon to change.

3 tips for managing working capital

Running a business in this market has to become a science not just a reliance on gut feel. The better you comprehend the numbers, the better your decision-making will be.

  1. Keep it simple
    .
    Keeping the business laser-like in its focus, with careful planning and execution, allows you to grow and retain earnings, pay down debt (and the tax man) and sleep at night.
      .
    When better times return, your track record of adjusting your business – taking considered and deliberate steps to making regular and rising profits – will make banks and new potential shareholders more willing to give you expansion capital.
    .
    So be patient and do the simple stuff consistently: if this is not exciting enough for you as a business owner, employ someone else to do it.
      .
  2. Know how much cash is tied up in your stock
      .
    Business owners usually see costs as total costs, and rarely drill down by product to find out exactly which products are delivering true gross margin.
      .
    Concentrating on a smaller range of fast moving stock lines leads to a lower working capital demand, perhaps even a lower unit cost (after negotiating a lower unit price based on increased volume) and an improved bottom line. All this helps generate the number one aim of every business – cash flow.
      .
    A fast-growth business we recently worked with found 75% of its inventory turned less than twice per year. As a consequence the business needed a bank facility to manage the cash short fall.
    .
    We helped identify slow moving products, which they are now rapidly selling off (so the bank facility can be reduced), even if the margin on aged stock has to be reduced – that’s a better outcome.
    .
    Another tip: don’t just talk to stakeholders in terms of gross margin. Talk stock turns on a per product basis – that will tell a knowing bank manager or shareholder you understand your business and which products turn into cash.
      .
  3. Get your monthly accounting in order
    .
    Prepare monthly accounts to spot trends. Then break down your revenue line into revenue per product and from there into each product’s gross margin.
    .
    Your accounting systems need to be set up so that you can easily see the true gross margin (and its relative contribution) of each product. Product costing systems are relatively sophisticated accounting systems that determine your product’s individual cost.
    .
    If these systems are beyond your budget, I’d suggest you mathematically work out the old way with pen, pencil and calculator!
    .
    To begin, work out how much raw material A, B & C is required for each product. Next work out how much time it takes to manufacture and time it. Work out the labour cost per minute – use an average hourly rate plus 30% for on costs – and add an estimate for overhead costs (which could be as much as 40% of the total cost of labour and raw materials).
      .
    Sell price less these total costs will give you a good rule of thumb for product margin. Even if it’s not 100% accurate you will notice each product’s relative contribution and be able to work out which product you should be looking to sell more of.
    .
    Be patient: tough times are a good opportunity to have a real “cold eyes” review of your business.
    .
    Once you understand your working capital drivers – that is, what products generate cash – and can demonstrate that to a potential investor (bank, shareholder or merger partner), you will have them banging down your door. Possibly sooner than you would think.

Steve Hogan is a Director of Vantage Performance, an award-winning national business transformation and turnaround firm known for its expertise and success in solving complex business challenges. Vantage was the winner of 2008, 2009, 2010, 2011 and 2012 Turnaround Management Association Turnaround of the Year Awards.

This blog first appeared as an article in the September 2012 issue of Dynamic Business magazine.

Related Blogs

Talk directly
with our specialists
Michael Fingland
Andrew Birch VP

Call Michael Fingland Email View Michael Fingland on LinkedIn

Michael Fingland

My philosophy is that there is always a way to solve a crisis, as long as you’re engaged early enough.

Call Andrew Birch Email View Andrew Birch on LinkedIn

Andrew Birch

Cooperative leadership teams that develop prioritised actions to progress towards clear strategic objectives can achieve long-term business viability.