6 ways to make working capital work for your small business

Smart working capital strategy is a hidden super power for small businesses. If you can understand your working capital position and use cash discerningly, you can really grow and sustain as a company.

Smart working capital strategy is a hidden super power for small businesses. If you can understand your working capital position and use cash discerningly, you can really grow and sustain as a company.

Smart working capital strategy is a hidden super power for small businesses. If you can understand your working capital position and use cash discerningly, you can really grow and sustain as a company.

Alexander Segerby

Co-founder & CPO

Smart working capital strategy is a hidden super power for small businesses. If you can understand your working capital position and use cash discerningly, you can really grow and sustain as a company.

But many SMB owners don’t pay close attention to their working capital situation. It’s either too hard to get a clear overview, or too distracting for founders. And that’s a mistake.

Here’s why you should take working capital management seriously, and six clear ways to do just that. 

What is working capital?

Working capital is simply the cash you have available to run your business day to day: your assets minus liabilities. This is the money dedicated to core operations: sourcing materials, selling products, paying staff, and keeping the lights on. 

It’s a measure of company liquidity, and one way for SMBs to measure their financial health.

Working capital is either positive or negative: 

  • Positive working capital means you have enough cash available to fund your current activities. 

  • Negative working capital means that you have less cash available than you need - your liabilities are higher than your assets.

Note: Higher (more positive) isn’t always better. Too much working capital might suggest that you have too much inventory, or that you’re underinvesting in growth. 

And negative working capital is often a great thing when managed well. You can make your outstanding payables (liabilities) work for you. We’ll see this in action shortly.

Why should you focus on working capital?

Most SMB owners don’t understand or pay close attention to their working capital position. You might see this as one in a list of obscure finance metrics better left to the experts. 

Or you might be busy thinking about the more fundamental challenges of building your company.

But running a thriving business is more than just the total amount of cash going in and out each month. The timing is also critical. And you can use your assets (and liabilities) to stimulate growth and run a highly efficient SMB.

6 ways to make working capital work for you

Whether you need to increase or decrease working capital depends on your growth trajectory. When times are good, you shouldn’t sit on a pile of unused cash. 

But as growth slows and the margins get tighter, you need smart ways to free up funds and remain ready to pay off liabilities when required.

Let’s look at examples of both scenarios.

1. Review (and enforce) your payment terms

Getting paid is a real issue for small businesses. One study found that 55% of UK SMBs still have outstanding invoices from the previous tax year. That’s money they can’t use, even if they’re owed it.

If that sounds familiar, you may need to address your accounts receivable process

Days sales outstanding (DSO) measures how many days it typically takes you to be paid for an order. And in the vast majority of cases, a lower DSO is better for small businesses.

A few ways to decrease your days sales outstanding:

  • Make it as easy as possible for customers to pay in full, up front. These obviously have a DSO of 0 days, and you have money in the bank immediately.

  • Review payment conditions for future invoices. Can you go from 90 days to 60 days? From 60 to 30? 

  • Consider early payment discounts. Over-discounting will likely hurt in the long term, but targeted, timely discounts can help when you’re short on cash.

  • Charge fees or interest for late payments. 

  • Get help with your collections process. Effective collections require experience, so make sure you have good people chasing up late payments. 

In many cases, simply paying attention to that DSO number and ensuring that clients actually do pay on time makes a big difference. 

2. Extend payment terms with suppliers

For inventory-heavy companies in industries like FMCG, logistics, and construction, this is a great option. But it potentially applies to any goods business with regular suppliers.

The longer you can wait to pay back suppliers, the more cash you can deploy today. And whether you have 30 days, 60 days, or more, that repayment window is essentially an interest-free loan.

Suppose you have a 30-day repayment window with a key supplier, but you sell inventory within 15 days. That liability - the debt - technically reduces your working capital. But you have 15 days until the debt is due, which means you can use those funds however you need. 

Gymshark used a negative cash conversion cycle to become a billion-pound company. They consistently sold products within the supplier repayment window, and could put the extra cash towards growing further.

This works brilliantly while the company is growing. But it becomes dangerous during a rough spell or as business dries up. So as with all these working capital steps, timing is everything.

3. Streamline inventory management

Inventory is a company asset. And because working capital is assets minus liabilities, more assets means a more positive working capital position. Sounds good, right?

Not exactly. Liquidity also matters, and until you sell those goods, you can’t use the cash. 

Look closely at your working capital to inventory ratio: the amount of working capital tied up in unsold inventory. The more unsold inventory you have at one time, the less disposable working capital you have

How to improve this ratio: 

  • Keep a detailed inventory and only stock up on what you need. Avoid making set, standard orders, and try to procure what you need when you need it. 

  • Taking this further, develop a “Just in time” (JIT) inventory approach: acquire goods from suppliers as close as possible to when you need them, but not before. This requires really solid processes and the ability to forecast demand accurately.
    Here’s a nice explainer from NetSuite.

  • Forecast demand as accurately as possible, and look for seasonality. Are there certain holidays, times of year, or other externalities that determine demand?

  • Categorise product lines by demand. Certainly don’t stock up on high-cost, hard to sell items that you know will sit there for long periods.

You’ll never achieve perfect inventory turnover. But try to avoid having items sit there, tying up working capital.

4. Use early payment discounts offered by suppliers

We saw above the value of a negative cash conversion cycle for growth. Here, we’re taking the opposite approach and repaying suppliers early, in exchange for a discount. 

While this decreases available cash in the immediate term, it can smooth out cash flow if timed well, and unlock higher margins in your business.

Getting really clever, you could even use one supplier’s long repayment terms to receive a discount with another:

  1. Purchase goods from Supplier A with a 90-day repayment window

  2. Sell that inventory within 30 days.

  3. Purchase goods from Supplier B (5% discount for up-front payment)

  4. Sell that inventory within 60 days and repay supplier A.

In reality, it’s not that clear cut, and you’ll have lots of supplier cycles running in tandem. But you get the idea. 

Finally, if you offer your own early payment discounts to clients (section 1 above), you could offset these with discounts from suppliers.

5. Bridge gaps with financing

When you need to increase cash now, financing may be the only option. 

Your options for a short-term line of credit

  • Bank loans. Borrow up to a predetermined amount, pay it back, and continue to borrow as needed. 

  • Factoring (or invoice discounting). Obtain credit against your outstanding accounts receivable, or simply sell on those outstanding invoices. You can even have the bank handle collections if getting clients to pay is a real struggle.

  • Unsecured working capital facilities. Platforms like Mimo offer businesses quick access to credit with no collateral required. This is much faster and more flexible than factoring or a bank loan.

The best option usually depends on the terms offered, whether you already have loans in place (and can extend easily), and how quickly you need the funds. 

We recommend unsecured working capital facilities when they’re built into your accounts payable tools, so there are no additional meetings and contracts to sign. Join our beta to see it in action here.

6. Use the right tech and tools

The chief reason why SMB owners haven’t mastered working capital is they just don’t have the right tools. Ideally, you want to achieve two things: 

  • Automate your accounts payable and receivable processes

  • Get clear visibility over money coming in and going out

Here are seven good tools that give you clarity about how and when money enters or leaves your business. 

Automate AP & AR

Any repetitive, transactional processes are best automated. This reduces errors and speeds everything up.

In both cases, start by digitising the whole process. There should be no paper invoices going in or out, and no trips to the post office. 

For payables, pay them in bulk wherever possible. Avoid making a manual bank run for each invoice. This streamlines supplier payments and ensures you don’t make mistakes or miss anything. And you can schedule transactions to maximise cash in your account.

For receivables, send out invoices, reminders, and collections notices automatically. This ensures you don’t miss out on cash and will be paid on time. 

Get visibility over cash

Your ultimate goal is a clear overview of money in and money out of the business. With this, you know when to use any of the six ideas above. 

Ideally you’ll have a cash flow forecast to predict when you’ll have more cash available (and can invest), and when you need to use the methods above to increase it. 

Crucially, visibility needs to be in real time - a live view of your situation today. If you’re always waiting until the end of the month, you can’t respond quickly to changes. 

Become a working capital wizard

As stated at the top, many SMB owners simply don’t think about working capital - at least not as a tool to use strategically. But this is a mistake, and can inhibit company growth and performance.

We’ve seen six intelligent ways to optimise working capital. But the key takeaways really boil down to these: 

  • Understand your working capital situation in real time. This requires visibility over money coming in and going out. Tools like Mimo can really help

  • Look ahead and build projections. These don’t need to be overly complex. You simply need to be able to see how working capital flows over time, to ensure you don’t get into trouble or miss out on opportunities. 

  • Strike when the chance arises. This could mean growing through negative working capital, or paying off debts early to reduce their burden and access discounts.

Smart working capital management sets high-level SMBs apart. Take your place as an industry leader with a better grip on cash.

Effortless business payments, with
credit built-in. Get started today.

Effortless business payments, with
credit built-in. Get started today.