Jun 24, 2025
Two things that are essential for any midsize business are working capital and optimisation. In this blog post we are going to take a look at some of the practical ways that you can improve working capital which in turn can help fuel long term success.
Working capital is what keeps your business running, not only does it help facilitate daily operations, but it also ensures that you are able to meet any financial obligations you have. When you improve your working capital it will also help you:
Improve your cash flow which is vital as it allows you to pay your staff, suppliers and any other business expenses you have incurred. This helps ensure that you maintain healthy relationships with stakeholders, preventing you from incurring any financial penalties while playing a significant part in keeping your business operating efficiently.
Increase cash on hand, This allows you to get the benefit of any discounts available for early payments or bulk purchases as well as opening up the possibility of liquidity investment options. By increasing cash on hand it may reduce the need for borrowing which in turn will lower your interest costs.
Strengthen your business's ability to seize growth opportunities, whether that means launching new initiatives, entering new markets, or enhancing operational capabilities, while also improving resilience against market disruptions. Maintaining a healthy working capital position not only supports day to day operations but also boosts your appeal to investors and lenders by showcasing strong financial management.
The formula for working capital is quite simple it is:
Current assets minus current liabilities = working capital
Your working capital is the difference between any assets the business currently has such as cash, inventory, accounts receivable and its liabilities which could include things like accounts payable or any short term debt you may have.
To give you a simple example, if a company balance sheet shows current assets of £300,000 with liabilities of £200,000 then the working capital would be £100,000.
Many medium sized businesses often find themselves faced with a number of challenges when looking to optimise their working capital.
Complex operations: When a business starts to grow day to day operations often become more complex which in turn can make the efficient management of working capital more problematic.
Limited resources: Medium sized enterprises don’t always have the resources, skill and experience to plan and put working capital management strategies in place.
Dependence on suppliers and customers: A lack of bargaining power with suppliers and customers can sometimes be a problem when it comes to negotiating favourable terms and managing your inventory effectively.
Cash flow volatility: Factors such as seasonal peaks and troughs, the economic climate and sales fluctuating can result in cash flow being unpredictable which can prove a challenge when you are looking to keep your working capital at an optimum level.
Lack of technology and tools: A Midsize business may not be able to access the type of advanced technology, tools or software that would help with forecasting cash flow, managing inventories or anything else associated with working capital management.
Risk aversion: It is not unusual for medium sized businesses to be reluctant to alter the way they work, even when it is likely to result in enhanced working capital management, this is mainly due to a fear of change.
The changing economic and technological landscape makes it difficult for treasuries to assess risk because there are a large number of variables to review.
Even though at first glance the challenges may appear formidable that doesn’t mean they can’t be solved. A financial professional such as a banker or accountant can assist when it comes to getting around some of the obstacles you may face, while helping you implement a strategy to improve your working capital.
Speed up accounts receivable: Although influencing customer payment habits can be challenging, you can encourage quicker payments by offering incentives such as discounts for early payments or the adjustment of payment terms. Digitising your invoicing and collections process also helps speed up your cash flow. The automation of collections and provision of digital invoices and a convenient payment portal, make it easier for customers to pay promptly.
Tighten accounts payable: There are a number of ways you can optimise working capital in your accounts payable. These include speaking to your suppliers to try and get better payment terms, improving efficiency of your payables processing by utilising electronic workflows and payment methods as well as making sure you benefit from early payment discounts.
Lower operating expenses: Start by pinpointing any opportunities you may have to cut costs without sacrificing quality. Some of the ways you can do this include streamlining workflows, renegotiating vendor agreements, or outsourcing certain tasks. Implementing some of these practices can result in significant savings while preserving the standard of your products and services as well as improving overall efficiency.
Improve visibility and controls: It is imperative that you have a clear view and are aware of the liquidity position of your business. Doing this will allow you to mitigate risk as it will allow you to get accurate cash flow forecasts, that will help determine the cash you need in the future, and give you the opportunity to accurately track and forecast what you need using inventory management tools.
Monitor and Manage working capital: Keep yourself well informed about the financial health of your company by regularly reviewing key performance indicators. To effectively manage working capital you need to track metrics such as receivables and payables turnover, the current and quick ratios, and the cash conversion cycle. By keeping a close eye on these figures you will be able to spot deviations from industry benchmarks or past performance, meaning you can take a proactive approach.
Explore financing solutions: Strong working capital management reduces dependence on external funding and enhances your ability to anticipate when additional capital may be required. When the need arises, you can evaluate various financing avenues, such as lines of credit, term loans, or invoice financing to cover short-term cash flow shortfalls and support business continuity.
To conclude by optimising working capital strategies medium sized businesses have the opportunity to improve financial performance. Even though it may be intimidating, the advantage of being a small or medium sized business is that cash requirements are less complex and organisations are flatter which helps them make quick decisions. The chance to capitalise on these advantages means that midsize businesses are in the perfect position to put long term working capital strategies in place.
