It’s a simple calculation that still causes many businesses to stumble: the ratio of debt to capital is a key indicator that your investors, lenders and financiers – as well as suppliers – will check. The decisions they make on what support they give you will be influenced by that ratio. Any action that can be taken to improve the ratio will open doors to better terms and more freedom to trade with confidence.
Freeing up capital by adjusting the ratio will immediately inject power into your growth strategy and plans. More orders can be accepted and better terms given to your customer, securing your position against competitors or accelerating growth. So it’s worth looking at your business to explore the potential to use your capital more efficiently.
Improving sales margins and profitability is one strategy that will see the ratio improve. Strengthening margins puts more cash in the business, as long as customers continue to pay on the same timescale. Raising prices can be a challenge in competitive markets so the first set could be to look at the sales mix: could sales of higher margin products be increased? Or could value be added to increase the margins across the range?
Reducing stock levels is a common method for adjusting the ratio. Building inventory can seem attractive if orders are rising but the drain on resources is a risk. Looking at more efficient, just in time processes, and reducing inventory is preferable.
Managing customer debts and payment cycles is another route to freeing capital and, for some businesses, it is the most accessible. Tighten up credit management processes and revenue flows will improve. Reduce bad debts and collect payments faster to gain the financial benefit and perhaps even free up management time for the important activities of business growth. We have designed SmartView to help businesses keep track of this critical information.
You may be on your own in terms of driving up sales or reducing inventory. When it comes to managing customer debts, we can bring decades of experience, powerful information and a range of services to support and assist your future business.