Building in financial security? Here's how to avoid cash flow problems
June 2023 – As an SME, you need to pay suppliers, employees and all kinds of fixed and variable costs. To do so, you obviously need money. But exactly how much working capital does your company need to function properly? And how can you tackle cash flow problems in a targeted way?
What is working capital?
Working capital (also known as net working capital) is the financial safety margin by which an organisation bridges the time required to convert inventory and trade receivables into cash. Working capital requirement is the amount you need to finance the operating cycle of your business, from the purchase of goods to the receipt of proceeds from sales.
Every business benefits from strict monitoring of cash flow, regardless of the size or nature of the organisation's operations.
Cash Conversion Cycle
The Cash Conversion Cycle is the period from the payment of commodities to the time you receive your cash for goods sold. You would do well to keep this time as short as possible. This is because it means that your working capital will come in quickly, so you will not develop a cash flow problem.
Efficient inventory management as a weapon against cash flow problems
If you do not want to run into problems with your working capital, then inventory management is crucial. This is because your inventory has a direct effect on your working capital. It is goods that have not yet been sold, but for which you have paid with money that you therefore cannot use to pay employees and suppliers.
Your stock needs to be balanced if you want to avoid cash flow problems. A critical review of your stock helps with this. Which goods should be in the warehouse at all times? And which ones are more seasonal or period-specific? Involve your purchasing and sales department in this. They can advise you perfectly on this. Finally, avoid so-called "shop daughters" (products that remain in the warehouse for a long time) by organising a stock sale from time to time.
