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10 ways to protect and maximise your working capital

Frugal finance professionals, rejoice! This blog shares some tips on how to effectively safeguard your working capital and reduce your cash leakage.
Person holding a jar with money inside, has their hand over the top, signifying protecting working capital

These days, we’re being asked to do more with less, and with a recent recession, it’s likely that we may have to tighten our metaphorical belts another couple of notches in the coming years. How can we assist with this to bring high effectiveness to the business? Through protecting working capital and ensuring controls for overspend and duplicate payments are rigorous.

What is working capital?

Working capital is the sum of your current assets minus current liabilities. Assets include inventory and cash, while liabilities are debt payments, bank credit, and operating expenses.

What is working capital management?

When you manage working capital effectively, you ensure efficient operations and growth. By reducing cash leakage, monitoring and using financial resources effectively, you maintain a good cash flow. You can use that cash to pay short-term debt and invest in sound growth opportunities.

Managing your working capital is a fine balancing act that can be challenging. You want to maximise your working capital so you can support your short-term business operations, but also you need to speculate to accumulate, so spending is necessary. We’ll share tips on effectively protecting your working capital in this blog.

Take precautions against fraud attempts, both internal and external.

Fraud is an eternal threat to businesses, with accounting firm BDO’s 2023 FraudTrack report valuing UK fraud at £2.3 billion. With regulations  tightening up for larger businesses, it’s more important than ever to have vigilant controls to prevent and find it when it occurs. For steps to improve your fraud prevention techniques and processes, see our CPD-accredited webinar here.

Identify areas of overspend.

We know overspend identification is a no-brainer. So, we want to offer alternatives to the usual supply expense, production cost and marketing budget reductions. A good first place to look is at your invoice and payment accuracy, as they may be contributing to overspending. Double-check your transactions for duplicates, incorrect values and more before payment run. Doing this before the payment run prevents cash leakage, thereby protects working capital.

Automate continuous checks on your transactions.

To prevent errors before payment run and keep cash in the bank, a monitoring solution like ours can help. We run constant checks for errors that include looking for duplicates and incorrect values. Last year alone we prevented £250m in duplicate payments from leaving our customers’ accounts.

Due diligence on all suppliers.

We know Procurement’s onboarding process ensures that your suppliers are safe to work with. They’ll check credit ratings, sanctions or politically exposed person lists and more. However, continuous monitoring will ensure that these checks are no longer ad-hoc and are always up to date instead. Your team will see potential difficulties immediately and act, protecting the supply chain. Our credit score, sanctions and ESG compliance monitoring delivers continuous monitoring so you can get one step ahead.

Not just this, but cleansing your master supplier file can seriously help you maximise working capital. Eradicating duplicate suppliers reduces confusion for POs and payments, while keeping your file up to date ensures payments are made to the correct bank accounts.

Stringent ordering processes.

Strict procedures during ordering can prevent unnecessary and duplicate orders from being made. A two-person order approval system and a PO-only policy can allow more effective transaction monitoring. This also helps puts a stop to maverick spend.

Precise inventory management.

Too much stock on the shelves can tie up large amounts of your working capital. Ensuring an equilibrium between having enough supply to support demand and not storing too much at once is essential to maximise your working capital.

Infographic outlining the steps in this blog to protect and maximise your working capital

Cut unnecessary expenses and control costs.

It sounds simple: reducing your outgoings will increase working capital. There are several ways to do this, including looking at budgets across the organisation. In terms of finance, in particular, your team can negotiate with suppliers and utilities for discounts or offers. There may be an opportunity for volume discounts or early payment discounts. They can also review your suppliers for more cost-effective products or services, or to consolidate vendors and deliveries.

It’s also important to keep an eye on colleague purchase cards and expenses. This assists with identifying internal fraud attempts and allows you to identify unnecessary purchases.

Prompt payment in accounts payable.

On-time payments allow for a more accurate reflection of working capital. You leave fewer liabilities outstanding this way. They also ensure you don’t risk penalties for late payments, keeping unnecessary payments to a minimum and protecting working capital.

Some suppliers give discounts to customers who pay early, so it’s useful to find this information out and strive to keep payments on time for them. On the other hand, negotiating longer payment terms with those who don’t offer incentives means you have more working capital open to you for longer.

Also remember that reputationally, all companies with over 250 employees and have an annual turnover of £36 million or more must publicly report on their payment practices, policies and performance. Our software includes standardised reporting to assist with this and to highlight any warning trends before the year is complete to allow rectification.

Timely collection of accounts receivable.

On the other side of the coin is your incoming cash. Introduce cash early in the cycle by asking for deposits of payment upfront, reducing credit terms and billing immediately upon sale.

Shorten your operating cycle.

Time can sometimes literally equal money. Is there anything you do now that could be made simpler and faster? A shorter cycle means increased cash flow, and thus higher working capital generation. This idea has plenty of moving parts and is something the entire business needs to be on board with to succeed. Usually there are a few key areas where this can be improved in terms of procure to pay: invoice validation, invoice entry, payment and statement reconciliation.

Working capital management is a difficult task, but with these tips, you can start building on your existing processes to maximise and protect it.

As a final thought, working capital ties into your whole business, so everyone has a part to play. Through consistent teamwork, thorough audit, and careful optimisation, you can improve processes for payments, collections, ordering and fraud, and therefore make a positive impact on your working capital.

FISCAL can help you monitor your transactions and suppliers.

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