Are you struggling to manage your cash flow? Do you have enough visibility over cash flow? One of the critical elements in any successful business is the effective management of working capital.

Working capital management is the ability of a business to utilise and turn its current assets into cash (mainly its cash, stock & debtors) while meeting all short-term obligations (current liabilities).  A business able to reduce this cycle (known as the working capital cycle) has a competitive advantage as it can access and deploy the additional cash before its competitors.

It is crucial for businesses of all sizes to have complete clarity around its available working capital, what influences their working capital cycle and effective management of it especially in an uncertain and volatile business environment.

1. Review of your working capital position and understanding key drivers

There are several measures which can be used to provide a better understanding of working capital.

The simplest tool for calculating working capital is the current ratio (Current assets – current liabilities). The general rule with the current ratio is that a result of 1.0 indicates an adequate amount of working capital; however, this can vary across different industries and the time of year for certain businesses that have seasonal shifts in demand.

Other useful tools to measure working capital and factors affecting the ability to accumulate working capital include review of the following:

  • Debtor days (Debtor Sales Outstanding – DSO), with a comparison to standard trading terms giving an indication of whether debtor collections are being managed appropriately.
  • Creditor days (Days Payable Outstanding – DPO), with a comparison to standard trading terms giving an indication of whether payments are in line with terms or being stretched; and
  • Inventory turnover days (Days Inventory Outstanding – DIO).

A detailed understanding of Debtors, Creditors and Inventory and effective management of the processes for these functions can result in significant business improvement and cash generation that can be utilised for decision making.

2. How can working capital be managed during times of uncertainty?

During times of uncertainty it is important for businesses to closely monitor cashflow on an ongoing basis and actively review their business processes to improve collections and stock turnover to convert debtors and stock into cash faster.

The following are examples of steps that management can take to get a better handle on cash and liquid assets to support their business in the short term:

  • Analysis of accounts receivable – A business’s Days Sales Outstanding (DSO) can be a reflection of customer satisfaction or quality of goods or services. Management should implement policies that encourage the quick payment of customers via clear payment terms and early payment discounts;
  • Extending Payables terms – Preservation of working capital can be achieved through delay to the end of credit terms or extending payment terms with suppliers where possible. However, businesses should be careful not to deprive supply chain partners of their own cash requirements when doing so, which could lead to potential quality or timeliness of critical supply.
  • Slow moving stock – identify slow moving items and implement sales programs to move items balancing the need not to impact the pricing of core lines;
  • Review stock ordering levels and quantities – reassess min / max order points and quantities based on historical sales and current forward orders. ;
  • Implementing a framework to manage supply chain risk – it is essential to understand the financial risks faced by key trading partners , customers and suppliers to ensure that adequate contingencies are in place should an element of the supply chain diminish or become unable to achieve outcomes;
  • Financing capacity checks – through this period, it is essential for businesses to reach out to their banks or other financing partners to ensure that financing options that were once available to the business remain accessible in the event of a working capital deficiency; and
  • Reconsideration of capital Investments – Given the uncertainty surrounding the coming trading period; it may be important for businesses to reconsider where to deploy capital expenditure and prioritise preservation of funds for ongoing operations.

In times of uncertainty, there are a number of continuing potential strains on businesses working capital position; however, through conscious management and assessment, management should be confident that maintaining a clear view of the current position and ongoing requirements should place them in a good position to manage any issues.

Reach out to our team for any assistance in forming a view of your working capital requirements, cash flow and managing your business through the next phase.