Funding is the water that helps businesses grow, but knowing how to reduce working capital burdens helps keep their roots strong.
If you run a business in South Africa with cash flow issues, you’re not alone. Many established small- to medium-sized enterprises (SMEs) run into the same roadblock.
Often, this is down to:
• Working capital tied up in overstocked inventory, thanks to slow-moving products that drain cash
• Late customer payments, often made worsened by tightening supplier terms
• Unexpected expenses, such as emergency repairs or equipment breakdowns that disrupt operations
Yet, drastically cutting costs can cause even more damage if it means sacrificing quality or customer satisfaction.
Instead, a measured approach to bringing down the working capital burden will help you free up more funds while protecting your business at the same time.
Read on to find out how to reduce working capital tie-ups effectively and safely, to create breathing room within your business.
Reducing working capital is a big first step, but to grow, you’re going to need funding. Explore Lula’s alternative funding solutions today and get the capital you need to take your business to new heights.
What is Working Capital Management?
One way to look at effective working capital management is as a battle plan that strategically handles your business’s current assets and liabilities, so that you have enough liquid funds to run your day-to-day operations smoothly.
This isn’t just about having cash in the bank, but also about skillfully handling the timing of your accounts receivable (money coming in) and accounts payable (money going out), as well as managing your inventory levels.
If you can do this well, you can bring down your liabilities relative to your assets (known as the working capital ratio) and free up cash that might otherwise be tied up.
SMEs with long-term success will almost always have excellent cash flow risk management and working capital practices.
How to Reduce Working Capital Pressure Safely: 8 Proven Tips
The road to improved working capital management may seem like a long one, but there are several smart moves you can make to drive immediate upgrades.
1. Use rolling cash flow forecasts and visibility tools
The business world is unpredictable, and we can’t see into the future; however, cash flow forecasting is the next best thing.
The best tools use AI-powered features to analyse your SME’s past financial patterns, including payables, scheduled payments, and receivables (based on issued invoices) to identify trends and predict future cash flow.
The more historical data they have access to over a longer duration, the more refined and accurate these projections become.
AI also comes into play with visibility. Many tools integrate with bank accounts and accounting software to give you a real-time view of your income, expenses and anticipated cash flow.
Once you know the exact nuts and bolts of your cash flow, you’ll be ideally positioned to iron out the inefficiencies that are unnecessarily adding to your working capital burden.
2. Optimise accounts receivable
One of the greatest strains on working capital comes from funds locked in outstanding invoices.
Delivering goods or services, only to wait weeks or even months to receive payment, puts a real strain on businesses. Nearly a quarter of small businesses in South Africa experienced cash flow issues due to late payments in 2023, according to a 2023 report by Xero. Many owners resorted to personal funds to stay afloat.
The real answer is to streamline the invoicing process, which you can achieve in a few steps:
- Issue invoices the moment you complete the sale
- Make sure your payment terms are clear and concise
- Follow up on outstanding invoices consistently but politely
- Offer early payment discounts for quick payments. These don’t have to be much – even a small percentage can motivate a customer to pay and not impact your cash inflow too much.
Carrying out one or two of these steps will help you reduce the Days Sales Outstanding (DSO) – the average time you spend waiting for an invoice – and the amount of working capital that you can’t directly access.
3. Negotiate favourable supplier terms
You may have already negotiated payment terms with your suppliers, but that doesn’t mean you can’t renegotiate deadlines or payment terms to get yourself a better deal.
If you’ve been buying from them for a while, then they’ll trust you to be a reliable payer and are more likely to agree to more flexible terms, including extended payment periods or lower pricing for bulk buys.
This creates a win-win scenario. More flexible terms mean a higher level of available working capital, making it more likely for you to repay other suppliers on time. They, in turn, will come to view you as a reliable customer whom they are happy to provide better payment terms to.
“Companies that manage their working capital effectively often enjoy stronger relationships with their suppliers,” says Steve Smith, US Chief Operating Officer at software developers Esker, writing for Forbes. “This can result in more favourable payment terms and long-term partnerships.”
Even if you’re not successful, you’ll have taken a step towards improving communication with them. Strong collaborative relationships are key to navigating through more turbulent times, so it could still stand you in good stead for the future.
4. Look into intelligent inventory management
Theft, shortages, incompetent staff and discrepancies between physical and recorded inventory are all contributors to inventory shortfalls that mean SMEs miss out on sales.
Slow-moving, or obsolete, inventory can also sit gathering dust on shelves and drain money out of your business.
Digital just-in-time (JIT) systems are an excellent way to improve inventory management for better cash flow.
They work by making sure you order exactly what your business needs when it needs it, instead of holding onto mountains of products. This involves tracking stock in real-time, automatically updating it for every purchase or sale, and even assessing demand to predict when inventory will sell.
Minimising the amount of tied-up stock also reduces storage and maintenance costs, which further brings the working capital burden down.
5. Trim unnecessary expenses
Every cent you save directly contributes to your company’s working capital and lessens the burden of financial strain.
Unnecessary expenses are the first place to hit here. Don’t just assume your current spending is fixed. Carry out regular audits across your business operations with a fine-tooth comb to cut out non-essential outlays. Are you paying for unused software subscriptions, for example, or incurring excessive transport costs for meetings that could be virtual?
Next, set clear budgets for each department (if they aren’t in place already) and make it a routine to review them. You may see here that you could negotiate a better rate for internet or mobile services, or switch to more energy-efficient lighting – both of which can add up to an important saving over time.
Cutting through the fat in this way keeps your business lean and agile, with a healthier supply of cash in reserve for those unforeseen costs later on.
6. Monitor KPIs to optimise working capital
Key performance indicators (KPIs) sound like a business gimmick, but they can give you excellent insights into the financial health of your business, especially those related to working capital.
Let’s take a look at three of these.
The Cash Conversion Cycle (CCC)
Think of the Cash Conversion Cycle as the time it takes to convert your investments in inventory and other resources into cash flow from sales.
A shorter CCC generally means your capital isn’t tied up for long, which means your business is liquid. A longer one, however, means you probably have several bottlenecks in your day-to-day systems.
Current ratio: current liabilities / current Assets
This metric looks at your ability to cover your short-term obligations with your short-term assets.
A current ratio above 1 suggests you have enough liquid assets to meet your immediate financial obligations. Below that, you may start to run into problems.
The CR is therefore a quick snapshot of your company’s working capital health.
Quick ratio: Current liabilities / (current assets – inventory)
Similar to the current ratio, the quick ratio excludes inventory from your short-term assets, so you get a more conservative view of your immediate liquidity.
A healthy quick ratio indicates you can meet your current liabilities even if you can’t quickly convert inventory into cash.
If your metrics turn out to be poor, then it’s time to take steps to improve them, particularly your CCC.
This is where inventory turnover optimisation – moving stock faster – and speeding up your accounts receivable (both steps mentioned above) can make a difference.
If you can bring down your days sales outstanding (DSO), as mentioned earlier, you’ll find that less capital is tied up and more is available to put towards growth. Heres a quick guide with the KPI’s to monitor to optimise your working capital.
7. Train your team in financial management and digital tools
Behind every great business is a great workforce – well-trained and skilled in the tools of their trade.
Targeted financial training for your staff is a powerful investment in your company’s future. This will help them understand the nuances of cash flow management and net working capital so that they will instinctively make better decisions to keep those capital burdens down.
They must also be ready to use the latest digital tools. The latest accounting software, like Xero and QuickBooks Online, now offer features like the automation of routine tasks and vastly improved forecasting accuracy that will make managing your company’s working capital much easier.
SMEs are catching on to this philosophy. 40% and 21% said that they intended to invest more deeply in upskilling staff and new technologies, respectively, in 2023, according to the Xero report.
Not doing the same may mean you put your business at a disadvantage compared to rivals.
8. Smart funding options
Many small businesses turn to traditional banking options like overdrafts and short-term loans, but these often eat up valuable working capital via high interest rates and hidden fees.
Yet the local lending industry is waking up to this problem with a selection of smart financing solutions that offer a more accessible form of SME lending and require less working capital to operate.
Lula is a business funding platform with three key financial solutions designed to help SMEs ease their working capital pressure.
Working Capital Alternatives
1. Revolving Capital Facility
Our Revolving Capital Facility is a readily available cash reserve that you can draw down from to help grow your business.
You only pay for what you use, and you can use it again once you’ve paid it back. This way, you get to improve your business’s liquidity without the hassle of reapplying, or recurring fees.
2. Capital Advance
Lula’s Capital Advance offers a quick, lump-sum injection of capital with a clear repayment schedule.
If you’re looking to invest in new inventory for a large order or new equipment, this provides fast access to funds, easing the strain on your existing operating capital with predictable, fixed terms.
3. Lulapay
Lulapay is a BNPL (Buy Now, Pay Later) solution that can be used to settle invoices upfront with suppliers while the buyer gets an extended repayment term of up to six months.
This allows buyers to receive their product or service without having to settle their invoice upfront enabling them to fulfil orders even during slow sale periods.
The result? Working capital that would otherwise be tied up while waiting for customer payments, and a boosted cash inflow.
Reducing working capital pressures is a marathon, not a sprint, but every step towards efficiency puts you in a stronger position.
With funding opportunities like Lula’s, you’ll be ready to fuel long-term growth and build your SME into the success that it deserves to be.
Need more working capital? Explore Lula’s alternative funding solutions today and unlock the funds you need to grow your business.
