CTG â a division of ILX Group plc, the company that provides tailored training programmes to the financial community and corporates, today offered businesses practical advice to help improve their working capital. Most importantly, according to CTG, businesses fail because they see working capital as an accounting rather than a business issue, when in fact every employee can have a positive or negative impact on working capital. To guarantee survival businesses must have the right processes, leadership and team approach to manage stock, creditors and debtors effectively.
The number of British businesses that fail is predicted to rise to 36,000 in 2009, the equivalent of one in every 56 companies. Many of those businesses may have been profitable but some may have failed because they did not manage their working capital. Martin Mitchell, Head of Operations at CTG comments, âThe demands of working capital mean that even profitable companies can run out of the cash thatâs needed to meet current expenses such as payroll, benefits, rent, and other liabilities. If you canât meet your payment schedules you will be forced out of business, so managing working capital is a commercial imperative that needs leadership from the top.â
CTG recommends five steps to improve working capital:
1. Focus your activities: To get cash into the business as quickly as possible, the sales team should flag new sales to the accounting team so that the invoice can be issued earlier rather than later â particularly for larger orders that have a bigger impact. Instilling daily rather than monthly or weekly invoicing as a core business process can dramatically reduce debtor days. Also, take a cold, hard look at what you sell. Bring together your sales and marketing, operational and accounting staff to review regularly the success of your product or service offering. Too often businesses are complacent and focus on the revenues they generate from some of their activities, but ignore the costs associated with less successful activities.
2. Leverage customer relationships: Customers often use excuses to avoid paying on time, saying that the invoice hasnât arrived or is incorrect. Frequently, this only becomes apparent at the end of the credit period when chasing outstanding payments. It is more efficient to use those closest to the customer, who agreed the terms of the sale, to pre-empt these problems. Integrate calls into your customer service strategy to ensure the customer received their invoice and identify any issues.
3. Secure and extend credit effectively: If you offer extended credit terms, make sure your salespeople donât over-negotiate. Set affordable credit terms limits and ensure customers know you have robust debt recovery processes if those terms are exceeded. Also ensure your purchasing manager secures payment terms that at least match those you extend to your customers; entering into a purchasing co-operative or similar arrangement can also cut costs or offer better terms.
4. Discount with care: Ironically, a successful sales team could have a negative effect on working capital if customers are offered discounts or extended credit terms. Ensure your salespeople know the limits â and impacts - of what they can offer and donât over-negotiate in order to close a sale. In addition, discounting tends to have hidden costs that arenât immediately apparent. Some accounting software packages will assume discounts are ongoing and consequently regular customers may pay a substantial part of their invoice at the right time, but leave some of the bill unpaid. Your business will then have to bear the cost of chasing that smaller amount.
5. Manage inventory: Controlling stock effectively has a major, positive impact. Focus on overall stock levels to identify lines that arenât selling rather than just ensuring popular stock lines are replenished, then lead the sales and marketing team in rationalising the number of lines you offer and focusing on your most profitable lines. Sourcing is also important. If possible, deal in consignment stock which can be held on your business premises but doesnât need to be paid for until you sell it on. This lowers your costs while maximising revenues, as will properly planning and managing stock levels to accommodate peaks and troughs in demand.
Martin Mitchell, Head of Operations at CTG concludes, âTreating working capital as a strategic business and operational issue rather than an accounting issue could secure the survival of your business. By encouraging management to get their staff to buy into that mindset â and adopt a few simple processes â it will help improve working capital within the business.â
CTG offers courses on working capital and finance training for non-financial managers.