News30.03.2020

Cash is King – Optimizing Your Working Capital

A vast number of companies is now facing the challenge startups deal with ever since the day they are born – cash is a scarce resource. It's vital not to freeze in the face of this crisis but to be agile and take quick action.

Because of the Corona-crisis revenue isn’t flowing as planned, but costs are accruing just as before. One of the tools in the entrepreneur’s survival kit is working capital optimization.

 

The two fronts of working capital management:

  • Accelerate incoming payments
  • Delay outgoing payments

 

Working capital consists of the cash tied up in the company’s operations at any given moment. To reduce it, you should postpone all outgoing payments as much as possible and get incoming payments to land on your account as early as possible. The principle sounds simple enough, but which concrete actions actually help in achieving this?

 

Optimizing incoming cash
  • Customer payments:
    • Payment terms
    • Timing of invoicing
    • Collection, factoring
  • Other payments:
    • Grants
    • Loans (not usually considered as part of working capital, but important nonetheless)

 

You should aim to negotiate short payment terms with your clients. This can take time, and therefore might not be the most useful aid in short-term cash crisis. However also the timing of invoicing is an important aspect in getting cash in earlier. You should send out invoices as early as possible – even if invoicing seems an unproductive administrative task you can postpone, it’s a vital part of the sales process. If the client fails to pay as agreed, swift collection procedures are important. You might also consider using factoring as a form of financing a part of the operations.

Because of the ongoing crisis the government subsidizes businesses heavily.  Look into the funding options of Business Finland, ELY-centers and Finnvera, at least (links at the end).

 

Optimizing outgoing cash
  • Supplier payments:
    • Payment terms
    • Timing of delivery and invoicing
  • Salary payment timing
  • Income tax, PAYE and VAT payments
  • Pension payments
  • Loan repayments

 

Negotiating longer payment terms and flexibility in delivery and invoicing schedules with suppliers helps you to manage outgoing cash. Given the current situation many landlords are temporarily granting longer payment terms, and for example Senate Properties (Senaatti Kiinteistöt) is giving as much as a 100% discount on two month’s rent for SME’s in distress. Don’t hesitate to contact your own landlord to negotiate temporary help for you, after all it is in your mutual interest to keep your business going.

The Tax Administration and Pension Funds are also granting payment arrangements for companies to delay their payments. If you are currently paying instalments on your loan, you can contact your bank to delay them as well.

 

Actions to take right now:

  • Contact significant suppliers to negotiate longer payment terms
  • Apply for funding from Business Finland/ELY-center/Finnvera
  • Send out sales invoices as early as possible

 

Actions to take on longer term:

  • Negotiate better permanent payment terms with customers and suppliers
  • Streamline invoicing and collection procedures

 

Are you interested in learning more about these tools, or do you need help in utilizing them? Rocket is specialized in the finance and accounting challenges of startups and growth companies, including managing working capital and cash. Contact us to discuss how we could help you get through this!

 

 

 

Useful links:

Business Finland Coronavirus Info:
https://www.businessfinland.fi/en/for-finnish-customers/coronavirus/

Finnvera Corona Info:
https://www.finnvera.fi/eng/growth/current-news-for-smes/current-news-for-smes

Ministry of Economic Affairs and Employment of Finland Corona Info
https://tem.fi/en/questions-and-answers-regarding-the-coronavirus-and-business-financing

Tax Administration payment arrangements:
https://www.vero.fi/en/About-us/newsroom/corona-situation/you-can-request-a-payment-arrangement-for-your-company-with-eased-terms/