Updated on 22nd November 2024

Finding the right cash flow option to ensure your business can manage its working capital is critical. From Invoice Finance to Business Loans, there are a number of financial solutions to ensure that the business can cover expenses, pay suppliers, fund further investment and ensure ongoing success.

How can a small or medium-sized enterprise reliably ensure access to sufficient working capital to promote business growth? In this guide, we will explore exactly that.

Understanding Working Capital

Effectively managing working capital is critical for a business’s financial health and operational agility. Working capital is a key indicator of a company’s liquidity and its efficiency in maintaining cash flow – in other words, the money flowing in and out of a business.

A recent Deloitte survey noted that, while 76% of Australian companies brought in more money last year than the year before, only 59% saw an increase in profit and 57% had more money tied up in working capital. This highlights the importance of having an effective working capital solution in place for your business.

What is working capital exactly?

Working capital is essential for covering daily expenses, fulfilling short-term debt obligations, and funding growth initiatives for a business.

You can calculate your business’s working capital using this simple formula:

Current Assets − Current Liabilities Working = Capital

Positive working capital means that a company can meet its expenses and operating costs, while negative working capital may signal potential financial distress or operational inefficiency.

Benefits of Effective Working Capital Management

Improved Liquidity

By optimising cash flow, businesses can ensure they have sufficient cash on hand to meet obligations and expenditure.

Increased Profitability

The more efficiently a business manages its working capital, the better it can reduce costs, improve margins, and  increase profits.

Greater Growth

With additional profits, a business can allocate more resources to growth and expansion.

Enhanced Efficiency

Streamlining operational processes related to accounts receivable, inventory management, and supplier payments can lead to more efficient operations overall and contribute positively to cash flow coming in and, ultimately, profit margins as well.

Predicting Future Cash Flow

Effective cash flow management needs to be proactive. Without anticipating cash flow to the best of one’s ability, you can find yourself struggling to cover the costs of growth or changes in the market.

Even growth can be destabilising. Taking on more clients, investing in new equipment or ordering new stock all puts pressure on access to working capital. In many cases, these outgoings and expenditure must be covered before payment from your larger client base comes in.

Fortunately, by predicting incomings and outgoings, you can avoid or manage these gaps in cash flow. A cash flow forecast allows you to determine cash balances at the end of a set period. The more information you have about the availability and timing of working capital, the better prepared you’ll be to manage cash access – or use one of the following nine cash flow options.

9 Cash Flow Options and Strategies

Here are nine ways to increase working capital and improve cash flow management.

1. Invoice Finance 

Invoice Finance is one of the fastest and easiest ways to ensure access to working capital. By using unpaid sales invoices as collateral, you can receive tomorrow’s due payments today.

How does it work? Instead of waiting the 30-plus payment period for your customers to settle their account with you, you can access up to 85% of the value of your invoices upfront. Then, when the client does pay, you can receive the remaining balance minus any fees.

At ScotPac, we offer several types of Invoice Finance, allowing you to tailor the solution to fit your business’s specific needs. With its flexibility, Invoice Finance can provide the working capital boost you need, right when you need it..

Want to find out more? Read our guide on What is Invoice Finance? Or try our online calculator to see how much value Invoice Finance could unlock for your business.

2. Business Loans 

Business loans are a common way for businesses to increase access to working capital and are an essential financial tool for managing operational expenses or sudden cash flow gaps.

The flexibility of a business loan allows it to be used for various purposes, such as purchasing inventory, covering payroll and overhead costs, bridging cash flow gaps, and seizing growth opportunities in the market. By providing quick access to sufficient working capital, tailored business loans can ensure effective cash flow management.

Additionally, business loans often have a shorter repayment period, making them ideal for addressing temporary cash flow challenges without incurring long-term debt and associated costs.

If you’re considering whether a business loan is the right solution to support your cash flow or fuel growth, our team at ScotPac is here to help. Reach out today to discuss how a business loan could support your goals.

3. Overdraft Facility 

A business overdraft provides a working capital safety net by allowing you to access funds beyond your business’s current account balance. Having this level of flexibility can be crucial if you are facing unexpected expenses or periods of cash flow due to supply or demand shocks in the market.

While overdraft facilities offer a convenient solution and can be useful, they do incur interest charges. However, once you repay the borrowed amount, interest payments cease too. Using your overdraft responsibly to minimise unnecessary costs is important to ensure that your access to working capital isn’t negatively affected.

Overdrafts can be a valuable tool for businesses facing short-term cash flow challenges provided your company can meet specific eligibility criteria. Plus, it is important to note that as your business expands and needs grow, you may need to renegotiate your overdraft limit with your lender.

4. Building a Cash Reserve 

A cash reserve is another form of safety net that can help you effectively manage cash flow. While it can be challenging for growing businesses to build up savings, even small, consistent contributions over time can lead to a substantial reserve.

If building a cash reserve is too difficult, you can always consider exploring finance facilities that offer a credit line or look into Invoice Finance. These solutions give you peace of mind that you can access the funds you need when and if necessary.

5. Equipment Finance 

When purchasing new equipment or machinery, equipment finance can be a good option to spread the cost over time. The right finance solution will help preserve cash flow whilst allowing ongoing investment, in essential assets, all without a significant upfront expense.

Equipment finance options can vary widely. In some cases, you may have the option to take full ownership of the asset after making the final payment at the end of the term and in other cases the ownership reverts to the lender.

One important note: Always factor in the ongoing maintenance costs associated with equipment ownership. While many equipment financing agreements include maintenance and repair coverage, providing added peace of mind, some do not. Check with your lending specialist before signing on the dotted line.

6. Efficient Accounts Receivable 

Sending invoices promptly, supported by an efficient accounts receivable process, can ensure that you receive payments quicker. It is also important that your invoice includes a clear and fair due date in a prominent location on the page.

If you offer discounts for early payments or fees for overdue payments, always include these on the invoice as well and make sure your clients or customers are aware of them.

As debt collection can be a time-consuming task, it’s not uncommon for small businesses to fall behind on it. Fortunately, Invoice Finance solutions often include option for account management services. In these cases, you raise the invoice, and the finance provider takes care of the debt collection. This allows you to focus your resources on growing your business rather than chasing unpaid invoices.

7. Early Payment Discounts 

While we are on the topic – early payment discounts can be an effective way to manage cash flow by encouraging clients and customers to settle their accounts more quickly.

By offering generous credit terms you can even win new customers all the while ensuring sufficient liquidity and access to working capital for your business.

Of course, it is always important to ensure that the discount be considered in light of other potential charges or interest servicing from financing. For a business operating on small margins, this might not be the most suitable solution for managing working capital.

8. Reduce Expenditure 

Cutting out unnecessary expenses is not always easy, but it can be effective.

Good cash flow management requires a dual focus on income generation, i.e., revenue and profit, and expense reduction. Especially during periods of restricted access to working capital, such as during low periods in seasonal demand or as a result of macroeconomic shocks, take a hard look at your business’s expenses to identify and cut unnecessary spending.

Identifying non-essential expenses allows you to consider the impact in delaying or getting rid of them. The less cash leaving your business, the better equipped you’ll be to invest in growth, meet unexpected costs, or build a cash reserve to weather economic challenges.

Also, remember that building strong relationships with your suppliers can also lead to negotiated discounts, improved trade terms and more money saved.

9. Invest in Supply Chain Optimisation 

There are opportunities to improve the management of your working capital in your supply chain.

Many businesses have a significant amount of working capital tied up in surplus inventory. Whether the goods move slowly or not at all, this can negatively impact cash flow. By optimising supply chain management, you can unlock these funds and use them to cover gaps in cash flow or reinvest in your business’s growth.

Some strategies for effective optimisation include offering clearance discounts, automated inventory management software, or the use of reserve inventory to both meet demand and reduce unnecessary loss.

Find out more about why supply chain finance and management are important here.

Find the Right Cash Flow Option with ScotPac

As the largest non-bank lender in Australia, ScotPac has over 35 years of experience and supports more than 8,500 businesses with tailored finance solutions. Our lending specialists have the expertise to help you find the right cash flow option to manage your working capital.

To learn more about how we can assist with managing your working capital, call us today or fill out the enquiry form below.