Business management

Optimise your working capital: an SME checklist

SME finance experts and entrepreneurs run through some of the most effective ways to optimise your working capital right now.

Below are some tips that could help make your business financially robust, resilient and ready for the rest of this year and beyond.

Become digitally dynamic

As well as potentially reducing your outgoings, going digital – ie relying less on physical spaces, supplies and products – can help your business become more dynamic in difficult times.

Christian Azolan, who owns an art and illustration business, has released physical premises and stock in order to stay relevant and financially secure during this period. He explains: “Going fully digital and working only on computers and iPads means I don’t have to rely on retailers and suppliers who might also be struggling right now. I can also work from anywhere.

“I’m now using a cloud-based print-on-demand service, too, which means I don’t need to buy or store unnecessary stock. And, as a bonus benefit, I can now easily sell my work internationally – it makes my business a lot more future-proof.”

Diversify your revenue

For Hannah-Beth Clark, owner of The Little Surprises Company, having a range of different revenue streams has helped to improve her enterprise’s financial stability.

“My business offers hand-picked experiences customers can buy their loved ones, and before lockdown, these were all in real life and based in the same city [London],” she says. “But when lockdown happened, we quickly had to pivot online to stay relevant.

“We’ve now got virtual surprises, real-life Little Surprises and are organising corporate events. It means that if one income stream is put on pause for a while, be it for Covid reasons or something else, we have other options.”

Reassess your incoming payment terms

When and how customers pay for products and services will directly impact your cash flow, so make regular checks on whether the terms you’ve agreed are helping or hindering your business. If it’s the latter, try to make changes.

“We’ve managed to negotiate better payment terms with many of our customers,” says Bay Burdett, founder of specialist low-FODMAP food retailer Bay’s Kitchen. “This ensures we are paid on the same terms that we have to pay our suppliers, meaning there aren’t any financial gaps to bridge.”

Consider how your unpaid invoices could help

There are many facilities available to allow businesses to leverage working capital. For example, money can be loaned against future invoices, then paid back when clients pay. Julie Ashmore, CEO of NatWest Rapid Cash, explains: “Businesses only borrow what they need, when they need it, and it gets paid back directly from their customers rather than the cash in their bank account.”

Burdett says her business has signed up to invoice discounting with some customers. “This is where invoices are approved and loaded to a portal and then we are notified – if we want them paid to us earlier, we have to offer a small percentage off the invoice and then can get it paid immediately or within 30 days rather than 60 or 90 days. If cash flow is good and we don’t need them paid earlier, they will just be paid in full on the original due date, so it’s very flexible.”

Leverage your accounts payable

Supplier payment terms may also be negotiable, as business coach Linda Plant, founder of the Linda Plant Business Blueprint Club, explains: “Maintaining a good credit score and positive relationships with creditors and suppliers should help you get a better deal if you need to improve your financial position.

When lockdown happened, we quickly had to pivot online to stay relevant. We’ve now got virtual surprises and are organising corporate events. It means if one income stream is put on pause, we have other options

Hannah-Beth Clark
The Little Surprises Company

“Check with suppliers for any available discounts, renegotiate payment terms as a loyal customer and look to pay your accounts at the end of each payment period. These are not permanent solutions to ongoing financial issues, but may provide an improvement to cash liquidity and buy you time to work on more sustainable measures.”

Fix your supply prices for accurate forecasting

Maintaining good financial health is not just about recording incomings and outgoings, but also about using accurate forecasts to plan ahead with as much confidence as possible.

“When we noticed some of our ingredients fluctuating in cost, we negotiated agreements with key suppliers to fix our prices for a set period of time,” says Jessica Harris, founder of family-targeted food brand Little Bandits. “This increases our degree of certainty and allows us to plan more confidently for the future.”

Hold regular streamlining sessions

Spending reviews highlight opportunities to streamline your business, and having them regularly – regardless of whether money’s tight or not – will help you stay financially lean in the long term.

“When was the last time you reviewed all of your business costs?” asks Chris Gough, accredited business adviser and founder of CGR Business Solutions. “Are your outgoings all necessary or are there some luxuries? Luxuries aren’t always a bad thing, but sometimes unnecessary costs can creep in or grow without you realising. Removing or reducing these is an easy way to improve your working capital position.”

“If you find a few improvement opportunities, prioritise what needs to be changed, as if you completely overhaul everything at one time, it may become chaotic,” Plant adds. “Evaluate your cost base, systems and processes then set out a schedule for implementing the changes.”

Don’t be afraid to seek support

Few small businesses have made it through 2020 with ease – don’t be afraid to seek some outside help.

According to Barry Cumberlidge of London-based Moose Accounting, your first port of call should be GOV.UK. “If you need help and haven’t already taken advantage of the government’s Bounce Back Loan Scheme, do it,” he says. “You can use this as a way of building resilience into your cash flow in case there is a further slowdown due to trading restrictions. The extra safety net could be the difference between survival and letting good team members go.”

Lastly, make it sustainable

A big financial overhaul will help considerably in the current climate, but make sure the changes you make are sustainable.

“Many businesses buy time by making initial cutbacks, but then fail to use this time wisely – don’t make the same mistake,” advises Frederic de Ryckman de Betz, CEO of Attic Self Storage. “Carry out a strategic review as soon as you’ve improved your cash position and make sure you have short-, medium- and long-term strategies to ensure your business remains profitable and ultimately viable.”

Download infographic

Working capital checklist (PDF, 102KB)

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of NatWest Group, as of this date and are subject to change without notice. Copyright © NatWest Group. All rights reserved.

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