Do you need to increase your overdraft?

October 10th, 2019     Improve Your Business

Having enough working capital is going to be important to have the business you need to have the life you want, so where do you get it from?

It doesn’t always have to come from more borrowing, by looking at the way you run your business there may be working capital locked up that can be released.

An example with numbers
Accountants love numbers! So here is a simple example to show how making changes to the way you run your business, could release working capital to grow your business.

 

  £ £  
Sales   500,000  
Cost of sales      
Opening stock 62,500    
Purchases 250,000    
Closing stock -62,500   Equivalent to three months sales
    250,000  
Gross profit   250,000  

 

Debtor days are 65 days sales, giving a figure of £89,041 for amounts owed by customers (500,000 x 65/365)

Change 1 – Speeding up customer payments

Reduce debtor days to 45; this will bring debtors down to £61,643 from £89,041, increasing cash in your bank account by £27,398

Change 2 – Cutting the stock you hold

Reduce the amount of stock held from 3 months sales to 1.5 months sales; this will bring the stock figure down to £31,250, releasing cash of £31,250

Combined effect of improved cash-flow £58,648.

How you make the changes will depend on your business, but often we have seen there is scope to making changes to the way things are done, so you can unlock cash for your business, which means you may not need such a big overdraft after all. What will you do with that cash?

We work with business owners to build the businesses they need to have the life they want, so if you want help considering if an overdraft really is your best option, get in touch with me on 01803 296678 or email andrew.price@andrewprice.co.uk