Cash is king

Freeing up capital — An alternative to taking on debt?

It may seem contradictory that a company’s cash reserves are empty even though there’s capital in the business. The real question is: Where is that capital tied up? Is it sitting in inventory like gold in a vault? Or are large outstanding receivables the culprit?

Freeing upworking capital can be extremely valuable — especially when interest rates are high and borrowing becomes an expensive way to improve liquidity.

By focusing on working capital, companies can unlock substantial amounts of cash. This involves reducing inventory levels, tightening invoicing routines, and taking full advantage of interest-free supplier credit.

To simplifythe concept, we often compare working capital to a sponge. The sponge soaks upwater — which you can then squeeze out — but if you let go, it fills up again. Working capital behaves the same way, except instead of water, it’s about money. The sponge soaks up funds in the form of excess inventory, unpaid receivables, and reduced supplier credit — all at the expense of your cash balance.

When you “squeeze the sponge” by reducing inventory, collecting receivables faster, and negotiating better payment terms with suppliers, that trapped money is released— boosting your cash flow and helping you sleep better at night.

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Pipe dream or practical strategy?

Naturally, the options available vary depending on several factors. Is your inventory made up of easily accessible products supplied by many vendors? Or are you dealing with long lead times and a small supplier base?

Who are your customers? Large multinational companies often operate with payment terms of 60 to 90 days — which can be extremely challenging for smaller suppliers to manage.

But how big of a problem is this really? Let’s say a company has $1 million in outstanding receivables, and its customers pay on average in 60 days. That might not sound unreasonable at first glance — but in effect, the company is offering its clients a $1 million interest-free loan for 60 days. If they had to borrow the same amount from a bank, it could cost $7,000–$8,000 depending on interest rates.

And to make matters worse, the company in our example may actually need to borrow that same amount to keep liquidity in check. Whether that’s a serious issue or not… we’ll let you decide.

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5 steps to improve liquidity: 

1. Negotiate Shorter Payment Terms 
   When new contracts are signed, sales teams need to understand that even shaving a single day off payment terms adds real value.

2. Invoice as Quickly as Possible 
   Efficient invoicing routines are absolutely essential. Ensure all billing data is accurate, and all documentation is in place to avoid delays. A fast, smooth invoicing process means cash hits the account sooner. 

3. Send Payment Reminders 
   Staying on top of payments and sending reminders promptly may feel uncomfortable — but it works.  
   

4. Run Credit Checks
   For larger deals or recurring volumes, it’s smart for sales reps to run a credit check on new clients. Better to avoid customers who already have a history of payment issues.  

5. Get Everyone on Board
   Everyone in the company need to understand why cash flow matters — and how to support it. Who’s responsible for which part of the payment process? What’s the chain of accountability?

Once everything is working as it should, cash will no longer get stuck in working capital. Profits from sales will hit the bank account faster, worries about covering expenses will ease, sleep will improve — and almost everything else will get better too.

Get in touch with us to learn how we can help your entire company pull in the same direction.