A wealthy business with strong revenues and high profits may or may not be a healthy one with sufficient cash flow to meet its future working capital needs, such as financing the purchase of raw materials and meeting overheads.
Understanding your business working capital cycle
By managing your working capital efficiently, you will ensure an adequate cash flow to meet your short-term expenses and obligations. Your working capital is determined by three main factors:
This refers to the payments made by customers to you. The faster you collect payments from your debtors, the more efficient is the working capital and you will be able to pay your suppliers faster. This can help you to repay your business debts and interests owed while lowering the amount of working capital required in your day-to-day operations.
Raw materials are typically supplied on credit. Negotiating for a longer credit period and better credit terms with your suppliers will also help to minimise the working capital that your business requires.
With efficient inventory management, you can unlock the cash in your stocks faster whilst allowing for uninterrupted production. This will enable you to reduce the costs of storage and re-ordering thus improving the overall efficiency of your working capital.
To further enhance your management of working capital, you need to determine your company's working capital cycle. This can be done by plotting out your business and trade cycles as shown on below:
Using a business cycle of 180 days and suppliers' trade terms of 30 days, a company will have to utilize bank's trade facilities to pay its suppliers. The trade facilities extend the credit period by 30 days, by which time production will be in progress.
However, a funding gap of 90 days remains until collections are made from the buyers. This gap can be addressed by one or a combination of the following:
With this information in hand, your bank will be able to structure the most appropriate trade financing solutions for your entire business cycle, optimise the use of your working capital and improve your cash flow.
We recognise that collections and payments are more than financial transactions. They are fundamental to your business and its financial health.
We have market-leading solutions to facilitate smooth cash flow to maximise its working capital efficiency. Our payments, collections and trade finance solutions provide certainty, control and convenience in managing your cash flow so you can focus on what really matters – growing your business.
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