Working Capital Optimisation in SME’s Part II
accountingcpd.net’s John Mardle brings you the second part of his series this week looking particularly at Days Payable Outstanding (DPO), inventory and stock and how they affect working capital.
by John Mardle
Sometimes it can be tempting to delay payments to suppliers to help working capital, but suppliers should be ‘respected’. They are the lifeblood to most SME’s and to curtail payments to them could cause them to withhold supplies and therefore jeopardise your customers or worse still close down altogether. Furthermore if you do not have an alternative supplier or one that you have already ‘vetted’ re. quality, capability and delivery performance then your business could be damaged irreparably. Negotiation will establish the grounds and criteria for payments i.e. certain tranches of cash could be paid at certain times. These payments though should never be missed once agreed as credibility can be seriously eroded. One should also consider interest payments on any outstanding monies if this has been previously agreed bearing in mind that legislation exists to levy 8% on top of current averaged base rates on outstanding monies.
Stock and work in progress accounts are part of inventory that requires special attention in these turbulent times. Stock monitoring should identify when demand for certain products/services is declining and steps need to be taken to reduce these purchases. However due to previously agreed ‘forward’ type contracts it may require extensive negotiation and/or mediation to ensure the revised contract if indeed it is agreed, to meet your new stock criteria.
Work in Progress can in some industries impact SME’s dramatically as these accounts can be subject to wildly differing valuations that can be very ‘subjective’. Recognising revenue and associated profit in advance of receiving cash can be exceptionally ‘dangerous’ to the credibility of the balance sheet and therefore to the company and its employees too! SME’s should attempt to clarify the contractual milestones for cash on major contracts so that they may mirror these in their own terms of supply. (It has already been admitted that many SME’s on the Olympic Games Construction site are severely cash ‘strapped’ because they having to work well in advance of any cash being paid to them and in some cases it may not be forthcoming at all!) Furthermore costs posted to work in progress accounts should be scrutinised by SME’s for accuracy and legitimacy as to write off a ‘non-invoicable’ amount, particularly at the year end and in full view of the auditors, could not only seriously impact that SME’s cash flow but also cause auditors some concern too regarding the rest of the balance sheet accounts.
Expenses are an integral part of SME’s cost base that need to be regularly reviewed to see whether limits on value are overly generous or whether the forms provide accurate enough information. Of particular interest would be forms that clients/customers may see as they are the basis for invoicing the client/customer. Furthermore if these forms are also the ‘entry’ forms for Work In Progress accounts then one should ensure that not only checks and balances are in place to ensure timely and accurate entry into balance sheet, but also to ‘guarantee’ invoicing can occur and payment of cash is not ‘challenged’ on the grounds of incomplete, inaccurate expense forms. Timesheets are another source of ‘disharmony’ that can cause internal friction and therefore diversionary costs to increase and could also lead to customer/client relationships being ‘soured, and therefore like expense forms need very careful scrutinising.
Look out for the final piece of this John’s blog, when he will identify the ten most common mistakes made with regard to WCO.