One of the most common things Ben Blacker hears from business owners is, “We’re making a profit, so why is there never any money in the bank?” The answer is almost always working capital. As Managing Director of Blacker Consulting, Ben helps businesses understand how much cash they need to operate, and how to fund it.
“Profit is an opinion, cash is a fact. You can be profitable on paper and still struggle to pay wages on Friday,” says Ben.
What Working Capital Actually Is
Put simply, working capital is the cash tied up in running the business day to day. It’s the money you’ve spent on stock, materials and wages that hasn’t yet come back from customers. The main parts are:
- Debtors: money customers owe you
- Stock or work in progress: goods and jobs you’ve paid for but not yet billed
- Creditors: money you owe suppliers, which offsets the other two
A Simple Way to Estimate What You Need
Ben suggests starting with your cash cycle: how many days pass between paying for something and getting paid for it.
- Average days to collect from customers (for example, 45 days)
- Plus average days stock or jobs sit before they’re billed (for example, 20 days)
- Minus average days you take to pay suppliers (for example, 30 days)
In this example the cash cycle is 35 days. Multiply that by your average daily costs and you have a rough idea of the working capital the business needs to tie up at any time. As the business grows, that number grows with it.
“Growth eats cash. A business that doubles its sales usually needs roughly double the working capital, and that’s where owners get caught out,” Ben explains.
Ways to Free Up Cash
- Shorten payment terms and invoice as soon as work is done
- Take deposits or progress payments on larger jobs
- Review slow moving stock
- Negotiate longer terms with key suppliers
Finance That Can Fill the Gap
When the business needs more working capital than it can generate itself, the right facility makes all the difference. Options include overdrafts, lines of credit, invoice or debtor finance, and trade finance for importers. The key is matching the facility to the problem: short term needs should be funded with short term finance, not a long term loan.
How Blacker Consulting Helps
Ben works with business owners and their accountants to measure the cash cycle, find the cash tied up in the business, and arrange the right working capital facility before it becomes urgent. The result is a business that can grow without running out of money along the way.
