Not enough working capital? Your business might be locked up

Working capital is essential to mitigate the uncertainties of business. While understanding your cash flow is important, the real power comes from understanding your working capital - the amount of cash you have left after short-term expenses are paid.

But even with cash flowing in, you might feel there isn’t much left in the business kitty after everything owing is paid.

How do you unlock more working capital, ensuring you have more than enough for liabilities as well as for growth and your contingency nest?

It starts by understanding working capital impacts, and getting to the centre of what’s really locking up your business.

What is working capital?
Let’s pause a moment and define working capital and how it’s calculated.

Working capital is your cash after your current liabilities are removed from your current assets. Unlike cash flow that looks after your money coming in and out of your business, working capital is your operating money left over after your debts are removed.

Current assets - current liabilities = Working Capital

Current assets
Assets that can be sold quickly and cash sums
- Cash
- Short-term investments and loans
- Inventory and stock
- Raw materials
- Accounts receivables
- Prepaid expenses (such as insurances)
- Other receivables (such as insurance claims or tax refunds)            

Current liabilities
Money owed in the next 12 months
- Wages
- Bills
- Debts owed within the next year
- Tax obligations and payments
- Interest payable on loans
- Deferred revenue (such as advanced customer payments)


Why is working capital important?
Working capital is used to run your business day to day and meet short-term financial obligations, such as wages and other expenses. Understanding your working capital can help you understand the cash you have on hand at any given time as well as ensure you have enough to cover everything you might be owing.

Having positive working capital not only means your business has the cash available to invest in growth but can also make qualifying for loans or lines of credit easier. It can also reduce risks and impacts of any cash flow fluctuations, such as seasonal trends. As such, it’s often something looked at with business advisory clients to help understand their overall financial health.

Unlocking your working capital
While ‘lockup’ might seem like simply a descriptive way to talk about working capital being unavailable, the term refers to the time (or number of days) to convert your work in progress and debtors into cash.

To unlock your working capital, it’s important to look at two areas:

- Work In Progress
- Debtors

Improving your Work in Progress
Your work in progress (WIP) is the work done but not yet invoiced, and refers to your raw materials, labour costs, and overheads incurred for the product or service.

WIPs differ from industry to industry, but can refer to:

- Projects or engagements in progress or completed but not invoiced
- Ongoing construction projects that are yet to be finished
- Products being assembled, fabricated or processed that are yet to be sold

As well as improving your working capital, your WIP can help you identify bottlenecks, enhance operational efficiency, and optimise productivity.


Ways to improve your WIP include:

- Issue interim accounts: Using an interim account will give you a snapshot of your WIP and help you forecast potential income.
- Streamline or automate your invoicing processes: This ensures your invoice is issued as soon as the engagement is complete.
- Provide payment schedules: Have a large project that needs to be paid at certain stages? It’s essential this is communicated up front with your customer to ensure you’re on the same page.
- Proactively communicate roadblocks and outstanding tasks: By clearly communicating any items impacting project delivery or completion, you can ensure the issues are raised and addressed faster.

Working with a business advisor such as McNamara and Company, you can not only get more visibility of your WIP but also put strategies in place.


Improving your Debtors
Your debtors refers to any money owed to you or your receivables. This unpaid money is listed on your balance sheet as a current asset, with the account balance due in 12 or less months. As an asset, it helps you measure your liquidity or ability to meet short-term obligations without additional cash flowing in.

To improve your debtors, you could implement one of the following:

- Create clear terms of trade
It’s essential these are shared up front with the customer, especially if shorter or longer than the average 30 days. This can be shared as part of the estimates or within your contract.

Unsure what terms you should be using for your business or industry? A business advisor such as McNamara and Company can provide guidance.


- Make payments easier
For some companies, paying by direct deposit might not be a problem. For others, it might mean you need to be onboarded as an official vendor. As such, they might prefer to pay once off or irregular payments by card.

By having different payment options available, you’ll make it easier (and faster) for customers to pay.


- Issue statements on overdue accounts
Make sure you follow-up with overdue accounts regularly, creating clear processes to issue overdue account statements promptly. This could also be followed up by phone call or a formal letter if required.

Better still, automate these notices and processes through your invoicing system. This is something your accountant or business advisor can help you apply, with options available in most online portals such as Xero.


- Ask for part payment or deposits up front
Whether these are payments before each stage commences, a 50% deposit to start the project or deposit for materials, issuing an invoice before work commences or supplying purchases decreases financial risks.


By applying these strategies to your WIP and debtors, you can unlock your working capital faster.

However, sometimes you may need to look further under the surface to understand what’s really impacting your working capital. This is where working with a business advisor or talking to your accountant can help shed light, helping you pinpoint what’s creating the lockup and put strategies in place to better manage and release your working capital.



Get insight into your working capital please call 03 9428 1062