Hire and Rental News - May 2012

16 / 92

16 | HIREANDRENTALNEWS | MAY 2012
INDUSTRY IN FOCUS
Working capital - receivables (debtors), inventory (stock) and payables
(creditors) - are the three economic pillars of a successful business
regardless of size or complexity.
Cash can get tied up in these areas and many businesses don’t know
why it happened or how to release it. This costs your business money,
and many small to medium businesses don’t have the time or access to
professional help to assist them to manage their working capital and
cash flow efficiently and effectively.
As well, many business owners believe working capital ‘will look after
itself’. Experience has shown it won’t!
In fact, less than optimal working capital management will cost your
business money and can be a reason for business failure.
Below are some best practice working capital tips:
• Your working capital doesn’t look after itself. You have to monitor
and manage each area individually and as a whole.
• It is a fundamental barometer of the success of a business. Understand
and manage working capital effectively and cash flow will be positive
and sustainable.
• Don’t over invest in working capital. A ratio of 2:1 (assets to liabilities)
is desirable. For example, receivables + inventory: payables should
roughly equal 2:1 for liquidity purposes.
• Have a plan to manage working capital. Don’t leave it to chance or
ignore it.
• Be consistent with invoice payment terms and make sure your
customer is clear about them. If possible, have all payment terms the
same, so you can manage the relationship between receiving invoice
payments to pay suppliers, overheads, staff and yourself.
• When you complete a job, send the invoice to your customer within
three business days.
For each job you have completed you should have a corresponding
invoice, sent quickly to your customer and recorded in an aged
debtors spread sheet.
• Make sure invoices are correct. Disputes over payment because the
invoice detail is incorrect are a major reason for delays in payment.
• Put all invoices into an aged receivables spread sheet by date issued,
customer, amount and the date to be paid. Invoices should be aged so
you can monitor the progress of payments. The ‘aged buckets’ should
include total, current (not due), 30 days, 60 days, 90 days and 120+
days.
• Similarly, age your payables, or money you owe suppliers etc. Where
possible, take early payment discounts. (bpworkingcapital can provide
templates for recording aged receivables and payables or, if you use
an accounting package, it may be available within the software.)
• Collecting money owed to you. Use ‘proactive collection’ to alert your
customer you are expecting an invoice to be paid on the due date.
This should be a call a couple of weeks out from when the payment
Managing working
capital to maximise
cash flow
bpworkingcapital specialises in helping association members
understand and manage working capital and cash flow
which is key to a successful business. In this article, Stephen
Hilton outlines some best practice tips for managing
working capital.