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Reducing the likelihood of a working capital crisis

Take control of your working capital drivers!

Paul Surtees Dec 07, 2016

Are you a business on the move, growing and expanding at pace? Exciting times but sometimes do you feel your business is at capacity? I can empathise. Capitalise.com is a rapidly growing business. We have gone from just two co-founders to 11 staff in less than a year and are looking to hire more.


As I write this article, I'm making my way to Liverpool to sign up yet another banner partner. It begs the question, how many more partners can I sign before we fall into the category of overtrading?


Overtrading is the scourge of young ambitious businesses who take on too much work. You are ambitious and you want to grow aggressively so that means some opportunities come that you cannot pass up.


The issue with overtrading is that fulfillment requires greater resources, whether that be people, working capital, net assets or all of the above. Unless there is spare capacity and resources in the business, there will be an impact on working capital driven by paying suppliers and staff before being paid by your client.



The best place to start is by getting a great accountant or finance director. Free yourself to focus on the business and look to them as a key advisor. Demand from them a cash flow forecast, ensure they understand your debtor/creditor days and have them explore your asset base. Once you've done that, review these frequently with your advisor. At Capitalise, we have built relationships with CIMA, PKF and the Association of UK Accountants. If you're in need of an advisor, do get in touch at support@capitalise.com!



There are a few ways in which you can take control of your working capital drivers:


1. Start by looking at your current assets less your current liabilities. It is this metric that will become increasingly stressed in an overtrading position.


2.  An accurate cash flow forecast is critical. This should be your go-to report, even before the PnL and B/S. This predictive tool will enable you to plan effectively. Matching inflows with outflows, you will be able to identify the impact of new business versus existing business, stress testing whether you can take on this work. We recently did a webinar with Float, who could help here. Float is an online cash management and forecasting tool that helps you manage your business and keep on top of your cash flow.


3.  It's important to know your debtor/credit days and then optimise the gap. Let me show you how that might be done. . .


You are owed £22,000 on a given date and your turnover £175,000 per year. To calculate your debtor days, just use the following equation:


(22,000 x 365 days) / £175,000 = 46 days


Now, your creditor days are the converse and it enables you to establish your average payment terms. So, to continue this example. . .

You owe £15,000 on a given day. To calculate your creditor days, just use the following equation:


(15,000 x 365 days) / 175,000 = 31 days


So your creditor days are 31, which means you have a gap of 15 days.


There are ways to reduce or bridge this gap (see my previous blog post on this topic) but invoice finance is always a good option, if you're looking for funding.


4. Hire purchasing/leasing is a good option too.  If you have assets in your business or need new ones, i.e., vehicles, plant or machinery, etc., then asset finance might be a good option. Rather than pay for these up front with the cash outflows, you can lease assets or buy them on hire purchase. This spreads the payments over a fixed period and can be tax deductible as you offset the interest costs.


Capitalise.com helps growing businesses every day. If you are looking for funding or an accountant then we are to help. With nearly 70 institutional lenders on our platform and a panel of over 500 accountants, regardless of your size, sector or stage, we can help you manage over trading.


Sign up today!


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