Advice

Efficiency gains

Electrical contractors can make a real difference to the bottom line by actively managing their working capital, says Andrew Harris

As uncertainty in the economy continues, maintaining steady and predictable cash flows remains paramount. Paradoxically, many businesses have an almost exclusive focus on growing sales and cutting costs rather than managing the cash flows associated with these sales. Getting on top of cash flows means ensuring you are paid in a timely manner, you don’t pay your suppliers early and you resist the temptation to invest heavily in unproductive stock.

Be proactive

Outline before any negotiation what terms you are happy to trade on. Can you afford to wait 60 or 90 days for payment? If you do have to wait for a protracted period, what are you going to charge for that delay to cover both the working capital funding and the extra risk you are taking on? Larger businesses are increasingly concerned about reliability of supply and are willing to pay quicker if it helps your cash flow and ensures you will still be supplying them in a year’s time.

Invoice promptly

Most companies want to pay on time for goods or services and will happily do so if the information that they require in order to pay is presented in a form that enables them to do so.

Call customers after an invoice has been sent to check they have all they need. We have seen examples of businesses that, when submitting an invoice to a new customer or dealing with a slow-paying customer, will hand deliver it to the customer’s accounts payable department to ensure they know exactly what they have to do to make the payment on time.

If you find yourself in a situation where it looks like a customer is not going to pay on time, you may need to consider whether it’s worth cutting a deal to ensure you receive some payment. This is especially important when the customer is in difficulty. This addresses a short-term issue, but is only effective if you make sure you don’t trade with that company again or, if you do, it’s on cash terms.

Handling payables

Many organisations that we work with tend to view payables as a pure cost area. This can lead to situations where invoices are paid as soon as they are received, rather than on their due date.

Paying systematically and chronically late is never a good idea because, over time, it may adversely affect relationships with suppliers. It is good business practice, however, to look back and compare payment date and paid date every so often. My guess is that you’ll be surprised how often you’ve funded your supplier’s working capital.

‘Look back and compare payment date and paid date every so often. You’ll be surprised how often you fund your supplier’s working capital’

Controlling inventory

Some businesses may decide to hold high inventories to ensure no sales are lost. But, while the overall objective is laudable, holding enough stock to cover all potential sales is not a viable working capital strategy.

The reason for this is that the relationship between customer service levels and inventory is exponential and you may require four or five times the inventory to cover 99 per cent of eventualities as opposed to 95 per cent.

When you factor stockholding costs such as funding, warehousing and obsolescence into the equation, the incremental revenue gained may be achieved at a loss.