Managing working capital

Copyright ©Nick Bettes Consulting www.nickbettes.co.uk

Finance

Working Capital


Agenda

• Business surgery

• Workshop

– Working capital

• Action planning


Course Overview and Positioning

MARKETING SALES OPERATIONS MONEY

SYSTEMISATION AND RESILIENCE

BUSINESS PLANNING

VALUE

BUSINESS DIRECTION

PEOPLE


Learning Objectives

• Workshop objectives

– To understand the concept of working capital and its importance to your business

– To understand how to manage working capital effectively


Working Capital Components

• The day-to-day distribution of funding in a business

• It appears on the balance sheet

– Cash

– Debtors

– Creditors

– Stock

– Work in progress


Working Capital In Use

Work done

Customer invoiced

Materials purchased

Materials paid for

Invoice paid

Creditors StockRetainedprofit

WIP Debtors Cash


Working Capital Ratios• Debtor days – the amount of money owed to you

by customers – minimise this– 365 * Debtors/annual turnover

• Creditor days – the amount of money you owe suppliers – maximise this– 365 * Creditors/annual turnover

• Stock days – indicates the amount of stock you hold – minimise this– 365 * Stock value/annual turnover

• These ratios will vary from industry to industry and over a business lifecycle


Managing Stock• Limit the range of items you sell as far as possible within the

constraints of your market proposition• Set up consignment stock arrangements (you hold the stock but

only pay your supplier when you sell the item)• Set up just in time or drop-ship arrangements• Incentivise your salespeople to sell slow-moving or obsolescent

stock• Balance volume discounts against holding cost and risk of

obsolescence• Ship older stock first – adopt a strict first-in-first-out approach• Understand usage patterns• Stock-take regularly and control wastage/shrinkage


Managing Work In Progress (WIP)• Measure it• Communicate between operations and finance

– Identify where a small amount of work will release a large amount of WIP

• Invoice quickly• For long projects, agree scheduled part-payments

so that you do not have to wait until the end of the job to invoice

• Ask for payments up-front, especially where you have significant up-front costs


Managing Debtors• Measure it• Use standard terms and conditions which are geared to

getting money in quickly• Control the amount of credit you extend to any customer• Get work signed-off• Invoice accurately, with all required information• Issue statements and reminders early• Develop good relationships with their accounts payable

people• Use a factoring, invoice-financing or invoice insurance

service


Managing Creditors

• Measure it

• Always try to have alternative suppliers

• Include the credit terms they are offering in your negotiations with suppliers

• Try to match or exceed the payment terms that you offer to your customers

• Pay on the due date and not before

• Use sales order factoring


Action Planning

• Suggestions

– Review your balance sheet every month

– Include working capital ratios in your KPIs and set stretch targets

– Review your terms and conditions and working capital related processes

Managing working capital

Business

Transcript of Managing working capital