{ FINANCE }
WORKING CAPITAL MANAGEMENT By Gary Chown ACIB MCIBS - Chartered Banker Director Commercial Banking NatWest Bank Gary.Chown@natwest.com Finding a way to manage working capital efficiently is one of the most important tasks facing SMEs today. Here, we take a look at the difference it can make for your company, and how you can come up with the right formula.
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or many SMEs, maintaining cashflow is a huge issue. In a recent survey conducted by payments company BACS, they estimated that more than a million UK SMEs were struggling with late payments, with the average amount owed being £36,000 But the other side of this coin, and one that tends to be much less remarked upon, is how late payment and poor credit control or cashflow management can affect an organisation’s ability to manage its working capital. This, in turn, is something that can colour not
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only whether a firm is able to survive but, just as importantly, whether it can take advantage of new opportunities when they arise. It is this ability that will help drive companies – and the country – out of the tough times. What do we actually mean by working capital? Working capital is closely related to cashflow – a factor that influences a company’s ability to access funds immediately – but the two terms shouldn’t be confused. Working capital is a balance sheet concept, and is what is left once you subtract what you owe to others (your creditors)
from what’s tied up in what you own (your stock) and what’s owed to you (your debtors). So is it a good idea to have a lot of working capital sloshing around in your business? Yes and no. Inevitably, companies have different needs and requirements. For some it may be imperative to maintain a “buffer” to ensure creditors can always be paid on the nail or to cover late payment (as above); others (perhaps those requiring large initial upfront or ongoing R&D investment) may need to operate a more debt-centred model.