With inflation currently sitting 7% and the official cash rate increasing 3.75 basis points in the past 10 months, we are starting to see several sectors feel the effects of the current economic downturn – with construction and retail being hardest hit at to date but other sectors are harbouring concerns.
Skilled business operators tightly manage the business oxygen working capital position between the costs incurred and when payment is received to keep businesses breathing even if some are short of breath at times.
Best practice risk management
Managing tight working capital in a tough economic climate can be challenging for businesses, but there are several strategies owners and managers can employ to navigate these difficult times, including some of these effective approaches:
- Monitor and forecast working capital
- Maintain a detailed understanding of cash inflows and outflows by regularly monitoring the financial position, particularly margins after other costs.
- Prepare working capital forecasts to anticipate any potential shortfalls or surpluses.
- This will help you identify potential issues early on and take appropriate actions.
- Control expenses: Review expenses thoroughly and identify areas where reduction in costs can be made without negatively impacting core operations. Look for opportunities to negotiate better terms with suppliers, reduce discretionary spending, and optimise inventory management to minimise carrying costs (sell down stock rather than hold on incurring costs).
- Improve cash collection: Promptly invoice customers and follow up on overdue payments. Consider offering incentives for early payments or implementing stricter credit control policies. If necessary, explore factoring or invoice financing to convert outstanding invoices into immediate cash but avoid if turnover is reducing and expected to continue on that trend.
- Negotiate with vendors and creditors: Engage in open communication with vendors and creditors. Request extended payment terms, discounts, or revised contracts that can help ease working capital burden. Many suppliers may be willing to work with customers during tough economic times to maintain a mutually beneficial relationship.
- Strengthen customer relationships: Focus on retaining existing customers and building strong relationships. Offer exceptional customer service, personalised experiences, and loyalty programs to encourage repeat business. Satisfied customers are more likely to pay promptly and recommend a business to others.
- Explore financing options: Consider short-term financing options such as business lines of credit, working capital loans, or business overdrafts to bridge temporary working capital gaps. However, carefully assess the terms and interest rates associated with these options to ensure they align with your long-term financial goals. A secured loan from owners and/or directors may also be an effective strategy. A low-cost option can include Krodok.
- Optimise inventory management: Review your inventory levels and streamline your purchasing process. Avoid excessive stock levels that tie up your cash, and prioritise inventory items with higher profit margins or faster turnover. Implement just-in-time inventory practices to minimise carrying costs.
- Renegotiate contracts and leases: Evaluate existing contracts and leases to identify opportunities for cost savings. Negotiate with landlords, suppliers, and service providers to renegotiate terms, lower rent, or secure more favourable pricing. Be prepared to leverage long-standing relationships and the current economic climate to your advantage.
- Seek professional advice: Consider consulting with financial advisors or business consultants who specialise in working capital management. They can provide valuable insights, identify potential areas for improvement, and help you develop tailored strategies based on your specific business needs.
For businesses looking to grow etc additional funding may be required. With high inflation and rising interest rates, the amount businesses and individuals are able to borrow may have changed downward.
It is best practice to review your debt structures when there is an upcoming transaction, purchase or major change coming as part of the forecast for FY24. However, in the current market, we recommend all businesses should review their debt structuring. It is imperative that any business with reasonable debt levels should now review their finance costs and all their products held.
The rising interest rates are having a positive impact in the short term to lenders profits and their net margins. This means lenders still have a good appetite to lend, good well-structured loans are still highly sort after.
Although it is important to understand that with the rising interest rates, lenders may look to bring in additional loan covenants such as an increase in insurance, loan to value ratios (LVRs), dividend restrictions etc.
Using a debt adviser to review the current position puts the business/individual in a better position and understands the options to consider. Following an assessment, an advisor can confirm the price of your facilities and the terms in which those facilities should be offered.
A debt advisor also knows that if times are difficult, they know how best to approach lenders – a borrower can have that difficult discussion with a debt adviser that is independent and in their corner before the lender is approached.
The Debt Advisory team can assist you with business loans, working capital needs and loan structuring.
Remember, managing tight working capital requires a proactive and disciplined approach. Regularly reassess financial positions, adjust strategies as needed, and remain vigilant in monitoring and controlling working capital to navigate challenging economic climates successfully.