Without steady, reliable, and predictable working capital coming in, even potentially profitable businesses can struggle to meet their financial obligations.

In this article, we’ll explore effective ways to boost your business cash flow, including key definitions, formulas, and practical strategies.

What is Working Capital?

Before diving into strategies for improving your business’s cash flow, it’s important to understand the concept of working capital.

Essentially, working capital is the difference between a company’s current assets and current liabilities. It represents the funds available for day-to-day operations, available money to fund short-term financial obligations and how much capital is accessible for taking advantage of growth opportunities.

Working Capital Formula

The formula for calculating working capital is quite simple: Working Capital = Current Assets – Current Liabilities

Simply take your current assets and subtract your current liabilities from them. What you are left with is your working capital. If your working capital is positive this is an indication that the business has enough available money to cover its short-term obligations, while negative working capital suggests potential cash flow issues.

Assets vs Liabilities

Current assets can typically include cash, accounts receivable, inventory, and other assets that can be converted to cash within a year. Typical current liabilities for a small business are debts and obligations due within a year, such as accounts payable, short-term loans, and taxes owed.

Working Capital vs Cash Flow: What is the difference?

Working capital and cash flow are distinct yet complementary financial concepts.

Working capital, calculated using the formula above from the balance sheet, shows the difference between current assets and current liabilities. This, in turn, provides a snapshot of a company’s short-term financial position and ability to meet immediate obligations.

Cash flow, on the other hand, measures the actual movement of money in and out of a business over a specific period. This is depicted in the company’s cash flow statement.

While working capital focuses on short-term liquidity and operational efficiency, cash flow offers a broader view of a company’s financial operations over a set period of time.

Both metrics are crucial for assessing a company’s financial health. However, cash flow can be used to make future projections, while working capital offers an immediate view of debt-paying ability.

Strategies to Boost Business Cash Flow

1. Optimise Accounts Receivable

Accelerating your accounts receivable process can help bring in cash flow more consistently and more speedily. How can you do this?

  • Offer early payment discounts to incentivise customers to settle accounts faster.
  • Implement stricter payment terms and conduct thorough credit checks on new customers.
  • Use electronic invoicing and automatic payment systems to speed up the collection process.
  • Follow up on overdue payments more promptly.
2. Optimise Inventory Management

Holding too much inventory ties up valuable working capital and prevents increased cash flow. ‘Just-in-time inventory management’ aims to reduce carrying costs and free up working capital to be used in improving your business operations.

By regularly reviewing and optimising stock levels, you can identify and get rid of slow-moving or obsolete inventory that prevents increased cash flow coming through the business.

You should also negotiate better terms with suppliers to enable smaller but more frequent deliveries.

3. Extend Accounts Payable

This method should be done carefully. Extending payment terms can improve your cash flow but it is important to also maintain good relationships with suppliers.

The key here is to take advantage of early payment discounts or bulk orders (within your optimised inventory management limitations). Prioritise payments to critical supplier relationships to free up working capital elsewhere.

4. Consider Leasing Assets

Assets like equipment and vehicles can often be leased rather than bought outright.

Doing so allows you to preserve working capital for other operational needs and provides more flexibility in operations. The greater you are able to invest in your business’s internal operations the more revenue and cash flow you can bring into the company.

5. Engage in Frequent Cash Flow Forecasting

Regularly forecasting your cash flow helps to not understand what your working capital position is likely to be but can help anticipate potential shortfalls. With this knowledge you can plan accordingly and make strategic decisions to mitigate risk factors.

Modern day accounting software makes generating cash flow projections easier than ever. You should set aside regular time to review and update forecasts to help identify seasonal trends and plan for lean periods carefully.

6. Diversify Revenue Streams

This strategy can particularly help businesses struggling with cash flow due to seasonal fluctuations or who are overly dependent on one supplier/supply chain.

Relying on a single product or service can make your business vulnerable to market shocks or changes in demand/supply. Consider diversifying your offerings by investing in and creating multiple income streams.

7. Review the Pricing Strategy

Regularly review and adjust your pricing strategy.

This financially savvy practice helps to ensure your offerings align with market conditions whilst making sure they cover your operating costs. Cash flow will be impacted by businesses being uncompetitive, whether by lack of profit.

8. Reduce Operating Expenses Where Possible

A lot of the strategies here focus on improving cash flowing into the business. But do not neglect cash flowing out of a business either.

Analyse and review your expenses and look for areas to cut costs without compromising quality or affecting operations. This can include negotiating better rates with providers, cutting unnecessary spending, or introducing energy-saving practices.

9. Invoice Finance

Invoice Finance, also known as accounts receivable financing, can be an effective way to improve cash flow.

This financial solution allows businesses to borrow money against the amount due to them in outstanding invoices from customers. With Invoice Factoring, you essentially sell your accounts receivable to a financial provider. With Invoice Discounting, you use your accounts receivable as collateral for a loan.

Invoice finance can provide quick access to working capital, helping bridge the gap between invoicing and payment receipt. In other words, freeing up cash flow.

10. Business Loans

Business loans can be helpful and effective financial solutions for short-term cash flow needs.

With the right terms, competitive interest rates, and manageable repayments, your business can fuel its own success with an injection of working capital.

ScotPac – here to boost your business!

ScotPac has been helping small businesses access tailored financial solutions for over 35 years. We understand just how multifaceted an approach to improving business cash flow needs to be.

That’s why we work with businesses to understand their working capital needs and business goals before making a recommendation on the best suited solution.

Whether you want to gain a better understanding of what is working capital and what is cash flow, or are ready to explore solutions to help your business succeed, contact the ScotPac team today.