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The following is an excerpt from an article by fellow Mindshop member, Peter Wallace, from New South Wales, Australia. 

Many businesses that have just managed to survive the Great Recession are now facing the daunting prospect of funding the recovery.  Typically, the weakest candidates go broke early on in a recession and many marginal businesses survive based on a bank’s unwillingness to take action.  Now with the recovery underway, the weaker businesses will struggle to access the necessary financing.

The best and generally cheapest source for financing your business already exists on your balance sheet in the form of lazy working capital.  Working capital is the amount of inventory and accounts receivable less payables.

Here are 6 tips for reducing your working capital:

  1. What gets measured gets done.  Make sure you are monitoring the level of working capital in your business and take action when it blows out.
  2. A sale costs you money until it is collected.  Focus on payment terms with your customers and watch for delinquency.  Do not let yourself become your customer’s bank.
  3. Some customers are not worth it.  A low profitability customer who pays late may not be worth keeping.
  4. Do unto others.  Seek to get extended payment terms from your suppliers.
  5. Reduce your inventory.  Implement a more effective inventory control system to reduce overproduction. 
  6. Invoice more frequently.  Especially for professional service firms, seek to reduce the level of work in progress.   Consider invoicing your customers more frequently – i.e., “bill early and bill often.”

Now is the time for business leaders to focus and ensure they operate efficiently, deliver value to customers and make the most of their limited capital base.  Focus on growth in profits at least as much as you focus on growth in sales.

Cash Flow and Working Capital

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