3 Effective Ways of Optimizing Your Working Capital as an SME

While business confidence often varies between individual nations, there also are global trends that have a universal impact across the globe.


So while Brexit may have had a decidedly negative impact on both business and consumer confidence in the UK, for example, we have also seen global sentiment falls against the backdrop of economic, social and geopolitical tensions.

Given this, it is prudent for all small and independent business-owners to re-evaluate their commercial strategies for the month ahead. More specifically, they must strive to reduce costs and minimize debt while optimising the amount of working capital that they have available at any given time.

Here are some creative measures that you can take to achieve this:

Drive Organic Growth in Line With a Sustainable Plan

The relationship between working capital and growth is a tenuous one, as expanding your venture does not always translate into higher profits and cash flow.

If you choose to expand your business at a disproportionate rate to demand, for example, you will most likely incur additional cost bases without necessarily increasing profits. Similarly, you may run of reducing your turnover if you take on additional work without increasing your resource base, in a misguided attempt to reduce costs.

With this in line, driving organic growth in line with a sustainable plan represents the best way of optimizing your businesses working capital. This is because it maximizes profitability at any given time, creating a positive cash flow that can run throughout the business.

Sell Your Accounts Receivable

One of the biggest issues for SMEs is dealing with variable invoice terms, which can range between 30, 60 and 90 day repayments. So even though you have booked and completed a high volume of work, burgeoning businesses may struggle to develop working capital from the outset.

In this respect, selling your accounts receivable to third party investors and firms is a progressive and low-risk way of increasing your working capital. Once a project has been completed and invoiced, you simply factor this and sell it to an interested party, before reinvesting the full amount into your venture. This is repaid when your client settles their invoice, enabling you to access capital as and when you need it.

Not only does this optimise working capital, but it also minimizes long-term debt levels within the company while improving relations with clients (who you do not have to chase for money on a recurring basis).

Minimize Inventory in Line With Demand

For product-oriented businesses, another key issue is the cost of procuring and storing an inventory. If you are not careful, you may over-commit at any given time and invest a disproportionate amount of capital into stock.

This can instantly reduce the working capital in your venture, which is why most SMEs have worked towards a demand forecast model in recent times.

This relies on data and the observation of sales spikes and the in-depth analysis of consumer behaviour, and it enables you to minimize your real-time inventory holding without compromising on the businesses operational capacity.

In short, you only ever procure and hold as much stock as you need at any given time, freeing up additional capital that can remain within the business.

As you can see, these options enable you to optimise your businesses working capital without encumbering your venture with long-term debt. This should be part of an holistic and sustainable business strategy, and one that also sees you build a store of personal wealth to reinvest into your business when required. Outlets such as tedthomas.com offer you access to the type of creative vehicle that can help you to make the most of your personal income, for example, which in turn creates a safety net during times of austerity.







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