We’ve all heard the phrase “cash is king” – and the reason we’ve all heard it is that whilst it has been around for many years, it applies as much now as it ever has. For a new or growing business cash can prove a real obstacle to growth, even when you have won that lucrative new contract you have been chasing. In this blog post we take a look at cash management in your business and how to make sure you plan in advance so that growth doesn’t get stunted.

What is working capital?
Working capital represents the amount of money a business needs to fund its operations.
When taking on that new customer it can be tempting to jump straight to the effect it will have on profits, but it is important to take a step back and think about the cash. How long will the customer take to pay you? Will you have to pay your suppliers / employees etc before the customer pays you? If so, how will you fund that? The amount of money required to cover that gap is your working capital.
As a small business accountant, Veritons offer free discovery meetings so if you wish to discuss the situation in your business, hit the button below to request.
How do I calculate working capital?
Working capital can be calculated as the value of your current assets (what is owed to you) less your current liabilities (what you owe to others), and to know what your working capital requirement is you will need to have good forecasts which work into them the impact the new customer will have. At Veritons we build bespoke business forecasts as every business is individual and will have its’ own characteristics and circumstances – all of which will have an effect. They need to forecast as accurately as possible what will be owed to you at any given point and what you will owe to others so that you know how much cash you will need. If your new customer requests 60 day payment terms but the longest terms you can get with your suppliers is 30 days then there is a cash requirement to fill.
What can I do to reduce or fund working capital?
Banks offer a number of products aimed at this exact situation, but they will take time to get in place and at Veritons we always stress the importance of being proactive rather than reactive. If you can see this situation occurring before it happens then it is a much nicer conversation to have with your bank manager. Things to consider include:
- Is it possible to have better payment terms with your customer? Is there scope to offer them an early settlement discount that they will take up? For example a 5% reduction to the invoice if paid within 14 days rather than 30.
- Can you negotiate better payment terms with your suppliers? If not, are there others that may offer better terms to win your business?
- Have you spoken to your bank? Products on offer will depend on your circumstances but might include a loan, an overdraft, stock financing, or invoice discounting – which is where the bank will advance you money based on the sales invoices you raise.
- Have you completed the exercise of detailed forecasts for the business? These are imperative, not just so you can see potential issues before they arise, but the bank is likely to want to see them before offering any product.
- Have you considered seeking investment? This can come in various guises, each with their own advantages and disadvantages. Whichever you choose the process will usually take some time to complete and you have the cash in the business, so it is definitely one option to consider earlier so as to not miss opportunities.
Some of the best businesses have fallen victim to inadequate working capital, so don’t let your business be one of them. The fact you are reading this article is a good first step, and the best next one would be to speak with us at Veritons so we can proactively help drive your business growth.
We finish with one of our favourite quotes on cash management:
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”
Michael Dell, Founder and CEO of Dell Technologies