Monday, 23 July 2018

Information and commentary for the small business banking industry

Helping your customers to improve their working capital

18 Mar

Explaining working capital

As all banks know, working with their small business customers isn’t just about lending money. Business owners, especially new ones, will look to their bank as one of the go-to sources of advice about many aspects of running a small business, and one of the most essential things they need to get to grips with is working capital.

Briefly, working capital’s what cash a business has each month to cover any expenses. So it’s easy enough to explain. What you’re looking to do is illustrate to your small business customers how to apply it to their business on a daily basis. Even if a business is profitable, there might still be working capital concerns.

And of course, the goal of all business owners is to improve their working capital, so they’ve got more cash to grow their business.

Easy-to-understand tips for improving working capital

Once your customers have got to grips with what working capital is, the next step is learning how to improve it. And as a bank, there are some simple tips you can provide them with that can become fundamental processes in their business.

  • Help them to understand their business cycle. Do they have cash coming in and going out daily, or are they on a seasonal cycle that sees a return only at the end of the season? Deciding on how much working capital they need will depend on their cycle.
  • Show them how to reduce their working capital needs. Avoiding large personal withdrawals, being careful not to over-trade, reducing inventory costs and making it easier for their customers to pay them are all good ways to reduce how much capital they’ll need.
  • Help them to conduct a cash flow forecast. If they’re new to business, they’ll probably need some help with this task. The more accurate their forecasts are, the better position they’ll be in to see what’s happening to their capital.
  • Check their financial health, and show them how to do it too, using quick test ratios such as the Working Capital ratio, Quick Asset or Liquidity Ratio, and the average rate of stock turn.

What you’re looking to do is reduce any working capital jitters your small business customers might have by helping them to fully understand what working capital is, how much their business needs, and ways they can continually improve on it. Once they’ve learned how to effectively manage it and have put these simple processes in place, it’ll become second nature to them, so that they can then focus on growing the business and increasing profitability.

And that’s definitely the kind of happy customers banks should be striving to achieve.

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