Cashflow is critical for businesses, but there’s another major piece of the puzzle you need to get right as well: working capital. Your business’s working capital and cashflow work together to help you not only meet your current expenses but to also accurately forecast your cashflow. A decrease in your working capital can inhibit your ability to grow but you won’t be able to proactively manage these times if you don’t have an accurate view of your cashflow.
In this article, we provide an overview of the difference between working capital and cashflow and some useful tips to help you better manage them within your business.
What is working capital?
Your working capital is the difference between your business’s current assets and liabilities. The accounting definition of “current” is assets you can convert to cash and liabilities due within 12 months. For most SMEs, assets that will convert into cash quickly are inventory and accounts receivable. Liabilities may include things such as short-term loans.
Having a large amount of or increases in your working capital means that you have adequate assets to pay for your current and future liabilities. A decline in your working capital could make it difficult to cover your liabilities, which may signal the need to make some changes to how you manage your business’s finances.
What is cashflow?
Cashflow is the money that moves in and out of your business. It’s important to note that cashflow doesn’t equate to net profit as many businesses sell using trade credit and use other finance options to supplement their cashflow. To proactively manage your business’s finances, you should always have an accurate short, medium and long term cashflow forecast available. This will help you identify early when finances may be tight so you can take action before it’s a problem.
What’s the difference between working capital and cashflow?
It’s important to understand the difference between working capital and cashflow. Your assets and liabilities drive the amount of working capital in your business. Working capital drives your cashflow. The amount of time it takes to convert your assets into cash is the working capital cycle. The faster and more consistently you can have assets converting to cash, the stronger your cashflow. If you are experiencing tight or negative cashflow due to late payments or stock that isn’t selling, you may be unable to pay your suppliers.
How to improve your cashflow and working capital management
If you’ve experienced a decline in working capital or your business has tight or negative cashflow, there are a range of levers you can use to unlock cash now and into the future. The table below provides an overview of different options you could try to manage each.*
Better manage your working capital
|Collecting late payments||Follow up all of the late payments owing to your business. Integrated payment solutions, like Spenda, take the fuss out of chasing late invoice payments. It allows suppliers and customers to send automated reminders and easily collaborate on repayments plans|
|Move ageing stock by having a sale.||If you have capital tied up in ageing stock, you could have a sale to move this stock quickly and convert it to cash. To avoid this problem in the future, implement an inventory management system which will help you accurately forecast what inventory you need to order and when.|
|Sell assets and convert these to lease agreements.||Look into entering asset buyback and lease agreements. This will involve selling assets such as technology hardware and equipment to an asset financing company who will then lease the assets back to your business. It can help you ensure you have the latest technology while providing your business with cash from the assets you use every day.|
|Complete thorough credit checks on new customers.||Implement processes and systems to complete thorough credit checks on new customers. For large orders, check the customer’s credit score. If a customer has a below average score but you’d still like to trade with that business, offer a lower credit limit to begin.|
Better manage your cashflow
|Offer discounts for early payment and Provide a range of payment options.||Providing customers with incentives to pay early along with a range of payment options will help you get paid faster. Spenda’s payment solution helps businesses by providing flexibility and integration in B2B transactions. Customers will enjoy the ability to pay via bank transfer or credit card and access trade finance through BNPL options.|
|Send invoices quickly.||For businesses that work out in the field, it may be difficult to send invoices quickly. A delayed invoice means delayed payment, so it’s important to set up systems that allow your business to get paid automatically as soon as goods and services are delivered.|
Manage your working capital and cashflow with ease
Spenda provides business owners with smarter digital tools to get paid faster and strategically manage their working capital and cashflow. Each go hand-in-hand to ensure you have enough money flowing through your business, while having enough capital available to deliver goods and services to your customers. And because our tools seamlessly integrate with accounting and ERP systems, you’ll enjoy the added efficiencies that come with automated and accurate data sharing across your business.
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*This article is for general information purposes only. Consult a qualified financial advisor regarding any changes to or decisions about your business’s finances.
Spenda delivers a fully integrated digital payment and business software solution that enables businesses to transform with fast, error-free digital efficiency. We’re on a mission to fundamentally change the way people do business by delivering digital tools that streamline business processes, and improve efficiency and payment practices, so businesses can trade faster and get paid quicker. For more information, visit www.spenda.co.