Working Capital Optimisation

Whatever your size of business or sector you operate in, working capital optimisation is one of the pillars of success.

Working capital optimisation has always been important for businesses, but there’s been increasing focus on it recently, intensified by the heightened level and frequency of external events that disrupt business. Whether that’s interruption of trade flows, COVID-19 or Brexit, this flurry of events has intensified business’ need to focus on the fundamentals – and working capital is key for every business.

Poor and ineffective management of working capital can lead to a whole host of issues, from hampering a business’ capacity to trade and grow, to reducing its value – potentially impacting any exit strategy – or its ability to pursue its strategic objectives, whether investing in transformation or expansion, de-leveraging or pursuing acquisitions. Even with an awareness of these potential issues, businesses can face challenges in effectively managing their working capital, but there is therefore also an opportunity for businesses in optimising working capital.

Monitoring the Cash Position of the Business

Whilst acknowledging that many of the challenges will be unique to a particular business or sector, there are common themes that emerge.  Frequently, it comes down to businesses not being able to effectively monitor their working capital cycle.  Without visibility, understanding how different elements of the cycle interact and perform is virtually impossible.  It’s also important as a business grows to ensure it captures the right information and uses the information wisely.

It’s a challenge that can be magnified in larger businesses, particularly with multiple locations across different geographies or those that have grown through bolt-on acquisitions, where systems may remain disparate and decentralisation has led to a lack of visibility and control or even an increasing use of non-standard payment terms.

Ensuring and maintaining internal engagement across functions is critical.  Within a larger business, there are many different functions that will play into the overall optimisation of working capital.  The purchase to pay element will be affected by Procurement, by Operations, and the debtor cycle by Sales.  It’s easy for these areas to be focused on their own, sometimes contrasting, objectives, but aligning these can make a real difference.

Regular reporting on these objectives and performance at monthly management or board meetings can help consolidate that buy-in and ensure that all areas of the business are aligned with the overall objective of optimising working capital.

Unlocking the opportunity in your working capital is a balancing act, with it being important to consider what’s achievable, the potential impacts and cost implications of addressing different areas, and balancing with other priorities with regards to developing sustainable relationships with suppliers or clients, or trying to drive increased profitability.

Business Focus

When it comes to addressing the challenges businesses face, there are both operational improvements and financial solutions that they can make to optimise their working capital.  The most important thing when considering the best approach, is to be driven by the data.  

Any business should ensure that it has;

1. Data – Access to timely, accurate and robust performance data across the working capital cycle

• Presentation – the business should also have a robust and rolling 13-week cash flow forecast

• Time – time to analyse that data, taking into account historic performance (what’s improved, what’s changed) and benchmarking it against your peers (are you outperforming or underperforming your industry/sector average).

• Action planning – This can help identify areas that either require improvement or are opportunities to release cash tied up in working capital.

Identifying those aspects of your working capital cycle that need attention is only part of the process.

Unlocking the opportunity in your working capital is a balancing act, with it being important to also consider what’s achievable, what the potential impacts and cost implications are of addressing different areas, balancing with other priorities with regards to developing sustainable relationships with suppliers or clients, or trying to drive increased profitability.

Incremental improvements across a number of areas could release more cash, for example, than a more revolutionary move, and there may be relatively quick wins such as harmonising terms where the same supplier is used across multiple sites or ensuring that payments are made in line with agreed terms, as well as more structural changes like segmenting suppliers or clients or re-negotiating payment terms.

Making Changes

In addition to operational changes, there are a number of financial and non-financial solutions that can help with both the efficiency of working capital management and its optimisation.

Citygate Commercial can work with you beginning with an open and consultative discussion to build an understanding of a business’ unique position and its challenges and then building out a solution to address those challenges and support the business’ longer-term objectives.

Solutions

Typical solutions range from overdrafts and revolving credit facilities to trade or foreign exchange solutions such as invoice finance, guarantees, or forward contracts. 

Equipment finance for those businesses with high capital expenditure needs and card programmes to support payment terms.

Different solutions align with different working capital challenges, in particular elements of each of the working capital cycles, and can help to mitigate risk, improve liquidity or visibility and control of cash.  So an holistic solution is required

With the need to forensically collect and examine data so crucial, tools that enhance a business’ visibility and control can make a real difference.   Innovative solutions such as cash flow forecasting tools have enabled greater automation to help identify potential working capital challenges and therefore, the need to optimise cash management.   Online platforms are available that provide real-time, 24/7 access to all accounts and provide a constant picture of business liquidity are the cornerstone of effective cash management, driving the data businesses need to be as effective as possible when it comes to prioritising working capital optimisation.”

For more information on solutions that can help you optimise your working capital call us at Citygate Commercial – we can help.