With most companies, but particularly startups and fast-growth companies, cash is undeniably king.

Yet, it’s not just about how much money you raise; it’s about how long you can make it last.

As a Finance leader, you know that understanding and efficiently managing your working capital is a pivotal strategy to extend the cash runway of your business.

So, how can we use working capital management to bolster our financial position?

What is Working Capital?

As a refresher, working capital is the difference between an organisation’s current assets (what the business owns) and its current liabilities (what the business owes). It represents the net resources available to finance day-to-day operations. A positive working capital indicates that a company can easily cover its short-term liabilities, whereas a negative value may signal potential liquidity issues.

You can calculate it easily by running a cashflow statement. The Working capital total is the sub-total before you look at the investment and financing transactions for the month.

Extending Cash Runway by Reviewing Working Capital

A lot of these are no-brainers, however it’s very easy to just carry on as is and focus on fundraising for equity or debt or encouraging teams to bring in more revenue. 

So, setting some time aside to really review current operations can be a substantial change.

1. Quicken Inflows

The faster you can turn your business operations into cash, the healthier your working capital cycle will be. Here's how:

Shorten Credit Terms: Instead of allowing a 45-day payment term, can you negotiate it down to 30 days or even 15 days?

How about upfront? Particularly if you have project based or subscription-based products or services, see if you can encourage payments to be on the 1^st of the month rather than the last day of the month.

Incentivise Early Payments: Offer small discounts for customers who pay their invoices ahead of schedule.

Similar to upfront payments, can you offer 12 months for the price of 11 months, but paid upfront? Not only are you getting the payments so much sooner, but you are “locking in” customers for a longer period. Double benefit.

Employ a dedicated Receivables Team: Ensure you have an automated system or individual in place whose primary role is to chase down invoices. There are so many ways to automate this process. Review regularly to see what is working and what isn’t.

Adopt Digital Payment Methods: In today's digital age, make it easier for clients to pay by accepting electronic transfers, or online payments, particularly if you have customers in the USA, who can still use cheques.

2. Delay Outflows

Conversely, to extend your cash runway, you'll want to manage your outflows prudently.

Negotiate with Suppliers: Can you extend payment terms with your vendors or negotiate bulk discounts?

Some suppliers may be up for slightly delayed payments, especially if you’re a key customer. Or if you plan to upgrade your requirements from a supplier, see if this can be offset with better terms.

Sometimes for a supplier, higher revenue on longer terms may be a better alternative.

Review Inventory Levels: Overstocking ties up cash. Regularly review inventory levels to ensure you’re not over-purchasing.

Maybe consider Just-in-Time Inventory. Instead of stocking up, can you switch to a just-in-time inventory system where goods are delivered right when they're needed?

Automate Payments but with Caution: While automating can ensure you never miss a payment, schedule them closer to due dates to retain cash longer.

Also, have a look at debit cards vs. credit cards. Although debit cards offer loads of benefits, particularly for smaller companies that like the virtual card options and the controls they offer, you are paying for goods, especially SaaS products with 0 terms.

As SaaS products are paid for upfront, if you can pay for these via a credit card that offers 45-day terms, you’ll have 45-day terms with these suppliers. Just ensure that the credit card annual fee isn’t too high.

Extending your startup’s cash runway isn’t just about fundraising or revenue generation. In many cases, it's about smart financial management. By focusing on working capital management strategies, you not only ensure liquidity but also create a financial cushion, allowing your startup the flexibility and time to pivot, innovate, and grow.

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