Working Capital Management

Working capital management involves ensuring a practice has positive working capital so it is able to continue its operations and have sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. A practice can be highly profitability and have a lot of assets (debtors and work in progress), but still be short of liquidity if these assets cannot readily be converted into cash.

The cash conversion cycle for a practice is the net number of days from the outlay of cash for employee wages and overheads to receiving payment from the clients for the invoiced services. The industry average is 45 days, but for poorly managed practices this can blow out to over 180 days (six months). Best practice is less than 14 days and naturally the lower this number the better.

Management of a practice’s working capital involves:

• Cash management – Identifying the cash balance which allows for the practice to meet day to day expenses without having ‘lazy’ cash on hand.
• Creditor management – Identifying the payment terms of creditors that help fund your practice but are not excessively unfair to suppliers. (Generally, not really that material as the practices biggest expenses are wages and rent and they need to be paid on time and cannot be stretched out).
• Debtor management – Identify credit terms which will attract clients but that can be economically funded. Ideally 7 or 14 days, but definitely no more than 30.
• Short-term financing – Identify the appropriate source of financing, given the cash conversion cycle. Normally a bank overdraft will be necessary to finance the debtors.