5 Tips to improve your working capital
Working capital is the life blood of any business. When you hear of businesses going into Business Rescue – fortunately not franchises to any extent– it’s often because they’re not turning over their working capital fast enough. If you’re turning over your working capital six times a year and making 10% on it each time – at the end of the year you’ve made 60%. If people are paying you slow, or you’re losing stock – your working capital can quickly erode to almost nothing.
Working capital is the money needed to fund the day-to-day operations of your business. All franchise businesses, indeed all businesses, have working capital and a working capital cycle.
The working capital cycle can be expressed in terms of days. For example, if it takes 45 days from the time you buy stock and put it on the shelves until it is sold, if you sell on credit and your debtors take 50 days on average to pay you, and if you pay your creditors 30 days after they have supplied you with stock, then your working capital cycle is now 65 days.
The old saying ‘Cash is king’ is never more important than here. Try to maximise cash sales if you want your franchised outlet to run smoothly, and follow these simple cash flow tips:
1. Keep the books tight and know your break-even point
The first thing you need to do is get your books in order. Many operationally-minded franchisees let their bookkeeping fall behind because they’re so busy on operations. Ignoring the books leads to invoices not being chased, hurting your working capital and ability to do future transactions. Be consistent in invoicing, accuracy of reports and forecasting. Find out what training is available from your franchisor and capitalise on it.
2. Reduce balance sheet debt
You can improve your overdraft balance by taking full advantage of any credit terms offered and insisting on cash payment by customers. Check if you are offering the same lines of credit as your competitors and whether you could look at an earlier payment date for your sales invoicing without losing customers.
3. Review your admin processes
Become proficient in your franchise’s admin processes and remember these are already proven. It’s worth following them for tried-and-tested results if you’re not doing so already, especially regarding your franchise’s credit control processes. These may help you achieve faster payments from your customers. Look at working in conjunction with your franchisor.
4. Take advantage of supplier credit lines
Retain your working capital by taking full advantage of credit lines offered by suppliers. Develop a close bond with your suppliers and pay them on time. If a temporary cash flow issue occurs and you’re unable to cover an invoice, they will be more likely to help you and extend your credit. Periodically review the terms you receive from suppliers – just as you would other expenses like insurance. Try to become a significant customer to them (perhaps by aggregating with other franchisees) to negotiate a better deal. If you’re cash flush, then negotiate to pay more quickly in return for discounts.
5. Have a contingency fund in place
Budget for the unexpected. Something out of the blue could dent your firm’s finances – unless it’s planned for. Do this by reining in your business spending and purchasing only items that are essential to earning more money. It can be tempting to splash out a bit when you’re making a healthy profit – but that’s the time to improve your working capital and create contingency reserves