Managing Your Cash Flow: Part Five

Jan 10, 2022

The fifth part in our ongoing blog series on cash flow management focuses on working capital, assets and liabilities, and how you could release some of the funds tied up in your business.

If you haven’t read the previous four articles, you can read them first or take a look after you’ve finished reading this post.

Part one: Cash flow basics

Part two: Failure to plan is planning to fail

Part three: Those who shout loudest get paid first

Part four: Must have or lust have


Part five: Working capital – make it work for you

Working capital is key to cash flow, as it tells you what monies the business has access to, and what it could realistically afford to borrow and pay back in the short term.

Your working capital usually refers to monies your business has tied up in inventory or unpaid invoices, and is usually calculated as current assets minus current liabilities. The optimal ratio for working capital is somewhere between 1.2 and 2, depending on your individual business, as anything below 1 indicates negative working capital and a number above 2 suggests your company isn’t reinvesting excess assets.

Too much working capital is just as bad as too little, if all of your capital is tied up in stock you might struggle to release the funds when you eventually need them. It’s a balancing act that requires constant maintenance and frequent adjusting.

For those times when you need to release funds, there are a few options you should consider before making a final decision, as it could have a lasting impact on your business.


Invoice finance

Invoice discounting, or invoice finance, is the most common solution to short-term cash problems for many businesses. Usually offered by a bank or large corporation, it involves advancing the business a percentage of invoiced sales.

Make sure to do your due diligence before signing any contracts, a bad agreement could leave you in more financial difficulty than your were already facing. Best practice would be to approach your bank first, using your accounts receivables as collateral, as their fees will be much lower than other invoice finance providers’.

Remember, passing your debts on to a third party will alter your relationship with your client, so be sure to consider all of the alternatives first.


Fixed asset finance

Fixed assets are also know as property, plant and equipment (PP&E), and are the things your business owns that can’t be easily converted into cash. You could sell non-core assets on a sale leaseback basis to free up some cash flow, and opt for renting large office equipment like printers and copiers rather than buying. You could even sell your premises and rent them back to free up liquid assets.


Equity vs. working capital

At this stage, you might be thinking that working capital sounds a lot like equity, but there are some big differences between the two concepts.

Equity refers to the actual value of a company—its total assets once associated liabilities have been deducted.

Working capital is the operational capacity of the business, or the funds it has available to continue functioning in the short term.

Both are important concepts for very different reasons, so don’t let a good (or bad) working capital give you a false impression of your business’s equity—or vice versa.


The next post in our cash flow management series, Shelter your assets, will take a closer look at insolvency and how you can protect yourself and your business from the financial impact.

Don’t want to wait? Click here to get our guide, Happiness is a Positive Cash Flow and read all our tips and advice for achieving and maintaining a positive cash flow.


Get in touch to discuss your individual circumstances and get some independent, impartial advice on your business’s financial health.


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