Working capital is essential for businesses’ long-term success and growth. This crucial financial metric represents the difference between a company’s current assets and its current liabilities.

But more practically, it serves as an indicator of a business’s overall short-term financial health and ability to meet its own operational needs.

To that end, managing working capital effectively is critical. Otherwise navigating the requirements of daily operations, financial uncertainty and market fluctuations can be challenging.

So, how can you best manage working capital to improve your business’s resilience and growth?

Understanding the Role of Working Capital

Before we dive into strategies and tips for managing working capital effectively, it is important to understand the significance of working capital itself.

Working capital is the accessible funds, i.e., cash, that your business can access to cover operational expenditure and unexpected costs.

If you have short-term financial obligations, overheads, manufacturing costs or potential investments that will help secure longer term growth and success, your access to working capital will determine your ability to meet these expenses.

Ensuring Resilience

Resilience is important for businesses for a variety of reasons. You might work in an industry that is subject to seasonal fluctuations, leading to uneven cash flow. Alternatively, there might be supply chain disruptions, market fluctuations, or geopolitical events that can cause unexpected challenges to your usual business activity.

Having the resilience, in terms of cash flow, to weather these temporary storms will give your business the robustness it needs to ensure its survival and even thrive in all sorts of economic and market environments.

Achieving Growth

On the other hand, though not entirely separate, is business growth. Working capital fuels growth. If you are thinking strategically about how to scale your business or expand into new product / service lines or markets, working capital is critical.

Of course, there is only so much planning one can do. While often businesses grow as a result of carefully planned strategies, growth opportunities can also arise unexpectedly due to rapid change in market conditions or demand. Having access to the working capital you need, when you need it, will give your business the ability and agility to seize these opportunities and capitalise on them in every sense of the word.

Resilience vs. Growth Working Capital Strategies

So how do strategies differ between resilience and growth goals? While they can work in conjunction with one another, it can be helpful to understand which overarching goal you are working towards with your financial solution and strategy.

Of course, it should be noted that both strategies require careful consideration of market conditions and your own business’s capabilities. All businesses need to remain agile and adaptable to survive and thrive in shifting economic landscapes while balancing longer term objectives.

Resilience Strategies

Working capital strategies for resilience emphasise liquidity. This is necessary to ensure financial robustness in the face of uncertainty and unforeseen challenges.

It can include:

  • Cash Flow Management – strong and accurate monitoring of cash flow and projected cash flow can help to ensure funds are available in case of a rainy day(s).
  • Inventory Control – optimising and strengthening your supply chain will ensure you neither tie up excessive capital in an excess of stock nor run out of the stock you need to meet periodic increases in demand.
  • Credit Management – having the financial resilience to extend favourable credit terms with customers whilst simultaneously minimising the debtor days for your own cash flow management purposes is important for ensuring your own business’s resilience.
Growth Strategies

Growth strategies offer a different focus. They are designed to leverage access to working capital to expand operations, increase market share, and diversify income streams.

It can include:

  • Investment in inventory or assets – increasing your stock levels to meet anticipated demand during expansion or acquiring assets to facilitate the delivery of your product / service requires access to working capital.
  • Funding accounts management – your accounts receivable management – your ability to efficiently collect debt owed to you, is an important but often significant expenditure. The more you invest in its capacity, the quicker you will receive payments from customers.
  • Strategic financing – having access to working capital ensures you can take advantage of opportunities presented to you by the market and/or invest in growth initiatives without risking the disruption of daily operations.

Tips on How to Manage Working Capital for Resilience and Growth

1. Engage in cash flow forecasting

Accurate and regular cash flow forecasting will help you identify potential shortfalls, plan for disruptions or growth opportunities, and reduce the risk of unpleasant surprises as much as possible.

2. Optimise inventory and stock levels

Just-in-time inventory systems and robust supply chains can help to minimise excess stock and therefore locked up capital, while still ensuring sufficient product availability to meet needs and support growth.

3. Invest in robust receivables collection

Favourable and fair payment terms for customers, coupled with incentives for early payments and strong accounts receivable capabilities, will ensure reliable and consistent cash flow for your business to both enable resilience and fund growth.

4. Negotiate fair supplier terms

On the other side of the equation, you should negotiate fair and favourable terms with your suppliers as well. Without straining relationships or introducing undue risk, improving cash flow through optimised supply chains will help both streamline your business for resilience and ensure you have as much access to working capital as possible to make the most of market opportunities.

5. Monitor Key Performance Indicators

From inventory turnover to outstanding debt, keeping an eye on performance indicators, in conjunction with projected cash flow, will help you maintain a strong understanding of your business’s financial health and operational efficiency.

6. Prioritise a financial safety net

A reserve of liquid assets, working capital and lines of credit can ensure you are never caught unprepared in the event of an emergency, sudden market shock, or even an unexpected growth opportunity.

7. Explore customised lending solutions

This is where ScotPac comes in. Exploring financial solutions, such as Invoice Finance or Business Loan, can ensure that your business does not suffer from cash flow gaps nor miss crucial growth opportunities.

Contact ScotPac today to find out more

ScotPac supports over 8,500 businesses and brings over 35 years of experience in ensuring small and medium sized enterprises have the right working capital solutions to achieve resilience and growth.

Our solutions are tailored to the needs and long term objectives of our clients to fuel their sustainable success. Want to find out more? Contact us to learn about who tailored business finance can help your business today!