Keeping tight control of your working capital can speed up the flow of cash into your business. Faster cash flow reduces the requirement for borrowed funds.In this chapter, three things that really matter:When you establish your business you need to give a great deal of thought to your working capital requirement.

Working capital is the amount you have invested in your business in terms of stock and debtors and the amount that others have invested on a short-term basis, i.e. your creditors.You need to be aware of the implications upon cash flow if your debtors fail to pay on time, or if you hold too much stock. Both of these tie up more cash than necessary, which could impact upon your ability to pay your debtors. In some cases this is a primary reason for business failure.

It is, therefore, important that you obtain the right balance from the outset. Remember, you can sell all of your stock at a paper profit but until you receive the cash it is not an actual profit. And until you can actually pay for the stock you have sold you are unlikely to be able to buy any more.

Is This You?

I won’t be able to obtain credit, I haven’t got any track record yet to enable a reference to be obtained. • I don’t intend to allow any of my potential customers any credit, I can’t afford to. • What difference does it make how much stock I hold or when I place any new orders? The supplier still delivers within 48 hours.

Negotiating Funding From Your Creditors

Many start-up businesses do not consider that they will be able to gain any credit from their suppliers. This is not always the case. Trade credit, as it is known, can be available but it will depend on the circumstances. If, for example, you are starting your business at an early age having just left school or university then yes, you may have problems obtaining credit.

If, on the other hand, you have been employed for many years in the same industry that you are now starting your own business in, you may find that obtaining trade credit is not difficult. You have an established track record in the industry and probably already know the suppliers with whom you will be dealing.

• The essential point is that you must research what is available. In other words, before you even start your business you must establish how much credit you can obtain and how long you will be given to pay. You cannot, for example, draw up any meaningful cash flow forecasts unless you assume from the outset that no credit will be available.

 

It can also take time to negotiate trade credit. In most cases, some form of reference will be required, probably from your bank. All banks have different philosophies when it comes to giving a reference on their customers and you will need to check the exact position with your own bank.

Keep To The Terms Of Trade

Having gained agreement to a credit account it is extremely important that you do not abuse that facility. It can be withdrawn just as easily as it was granted and this could place severe pressure on cash flow. Always adhere to the agreed terms of the credit and make payment promptly when it is required.

• Failure to pay on time could also render you liable to penalties.

 

Legislation was introduced in 1998 to allow, under certain circumstances, for interest to be charged on outstanding invoices at the rate of 8% above Bank of England base rate. This could be a substantial amount and is therefore something that you should avoid at all cost. If, of course, your creditors start to charge you on this basis it is also likely that they will have already withdrawn your credit facility.