The past six months have brought significant disruption for businesses in London. But, despite the uncertainty and changeability of the current climate, firms are continuing to try to adapt and are tentatively looking to recovery.
Whether considering short-term challenges or longer-term solutions, financial flexibility should be at the forefront of firms’ fight-back strategies. Effectively-managed cash and working capital – the amount of money tied-up in the day-to-day cost of running a business – is key to companies achieving their goals.
Good working capital management can give firms the financial flexibility and headroom they need to capitalise on new opportunities and weather interrupted periods of trade. And there are some core components to cashflow management worth keeping front of mind in the current environment.
Fine tune your forecasting
Forecasting customer demand is obviously going to be extremely difficult in unprecedented circumstances such as these. However, it does remain a critical task – helping to determine whether there is sufficient liquidity to cover planned operations and investment during a given period, say, the next quarter.
As a good first step, it’s important for businesses to talk to their customers to understand their plans and the profile of their orders in knowing what to expect and how their working capital position may need to change in response.
It’s sensible to review and update customer lead times and payment terms to reflect current trading conditions in order to clearly understand how much working capital is required.
Control your cash and costs
A well-managed cashflow status is key to supporting overall resilience and building sustainable growth.
Cost control plays a big part in this, so carefully tracking outgoings, including any discretionary spend, is crucial. As well as cutting costs, it’s worth considering whether it’s possible to defer them, in order to preserve resources in the closer term.
Firms can also explore different financing options to change the profile of any essential payments, helping to ease immediate cash burdens and bolster flexibility.
Invoice finance, for example, allows companies to access up to 90 per cent of the value of an invoice within 24 hours of it being issued, guaranteeing that cash will be available even if payments from customers are delayed.
Asset-based lending allows businesses to access the capital they have tied up in extra stock, as well as plant, machinery or property, increasing liquidity to support necessary investment.
Carefully plan cash profiles
Some of the city’s businesses, particularly those in the service sector, will operate on a contract basis.
It seems an obvious thing to say, but ideally, every contract should have a positive cashflow – in practice, this means cash inflows should be greater than cash outflows.
With this in mind, businesses should look to establish invoicing milestones in the project, with clear parameters for the amount of cost that can be built-up before invoicing is required. These milestones should be understood by finance and operational teams so that everyone is absolutely clear of what is expected.
It’s also beneficial to have a good understanding of the customer’s invoice approval process in order to reduce payment delays, which put further pressure on working capital cycles.
Address supply chain disruptions and delays
The events of the past few months have highlighted the significant impact supply chain disruptions can have on output.
It can be tempting to stockpile to help trade through supply interruptions and minimise damage to output, but this can have significant working capital implications by tying-up cash in inventory.
Maintaining regular communications with your suppliers and investing the time in understanding every part of your supply chain will help inform good inventory management – ultimately helping firms to avoid tying-up more cash than they need to in stock, while ensuring their business can still operate.
Here to help
At Lloyds Bank, we’ve worked side by side with businesses to develop a specialist working capital management tool that allows them to evaluate their cash flow and collection cycles to identify where any pressure points lie. This can help London firms develop a better understanding of their financial picture, and determine the steps they may need to take to improve cashflow before investing in assets such as extra staff or stock.
As we’ve already seen this year, we can’t always predict what’s coming down the line. However, following good working capital management principles will help. Whatever lies ahead, we’ll remain by the side of the city’s small firms to help ensure they are in the best possible position to deal with challenges and invest for growth as they look to the future.