3 ways merchants can optimise their working capital
The majority of small to medium businesses require finance to grow, and whilst there are a variety of options available to businesses, most settle with a working capital solution such as an overdraft, line of credit, debtor/invoice financing facility. These facilities should operate in unison with your business as it grows. It is therefore crucial that as you borrow more for your growing business, you give careful consideration to all aspects of your working capital solution, particularly the interest rate.
Whilst the interest rates your financial provider are offering are crucial and should be afforded your attention, there are a number of other key strategies that business owners can use to optimise their working capital solution. These include:
Budget and project your cash flow
All too often businesses don’t conduct accurate cash flow forecasts and are therefore caught out when revenue is down and expenses are up. Unfortunately months where revenue is down often coincide with months where payables and supplier payments are up as businesses must pay for stock they purchased during the busy period. You must know when you’re likely to experience these cash flow negative months.
It’s important to reconcile your actual expenses and income against your budgets and projections as often as possible. This is the best way to identify the months where you’ll need to have contingency plans in place.
Negotiate extended payment terms with suppliers
These days most local suppliers will offer trading terms provided you meet their credit criteria. Whilst they may not be willing to offer credit to you if you’re a new customer and/or you don’t meet these criteria, it never hurts to ask the question, and equally importantly to understand what you’d have to do to obtain terms with them.
Businesses can often free up working capital by seeking terms with their suppliers. Dun and Bradstreet reported in 2015 that the average payment time in Australia was 49.2 days. This means businesses in Australia are achieving roughly 7 weeks of credit from their suppliers which, for all small to medium businesses, can be the difference between a comfortable or difficult month.
Equip your business with a working capital solution
It’s always a good idea to consider a financing option that offers enough working capital to ensure there is sufficient cash in your business for the ‘worst case scenario’, and eases the cash-flow pains of growth. A general rule of thumb is that businesses should have liquid assets (cash, receivables etc) equal to three to six months of operating expenses. The best way to ensure your business has this much cash available is to establish a financing facility that provides this to you.
An example of a finance solution that could aid your business in this regard is trade finance.
What is trade finance?
Trade finance (also referred to as purchase order finance, supply chain finance or import finance) can offer the flexibility businesses need without the pitfalls associated with traditional forms of finance and has become a key tool in financing inputs for many businesses.
How trade finance works
Trade Finance establishes a revolving line of credit to pay your suppliers – using someone else’s money to settle your accounts payable. This assists growth while smoothing any cash flow volatility and lets you focus on closing sales rather than worrying about financing them. It functions in the following way:
- You place an order with your supplier (who may be in Australia or overseas) for a product or service and the supplier issues an invoice to you.
- You then have to pay that invoice within the terms outlined by your supplier (anywhere from 1 to 90 days).
- On the invoice due date – instead of dipping into your cash reserves to pay the invoice, you submit the invoice to your trade finance provider who then pays the supplier on your behalf.
- You pay back your financier within an agreed time period.
Why trade finance?
- Obtain early payment discounts – suppliers often offer a discount to early paying customers, particularly overseas ones.
- Smooth your cash-flow cycle.
- Fund your business without mortgaging your house.
- Works seamlessly with other forms of finance.
- Interest free terms.
Need assistance with financing your business?
The team at Naritas are experts in delivering timely guidance & commercial finance approvals. We have over 100 lenders on our panel & a high quality team of dedicated commercial credit advisers to steer you efficiently through the approval process.