Managing Working Capital
In June the Bank of England increased interest rates for a 13th consecutive time in an effort to control and reduce the rate of inflation. At their highest rates for 15 years, interest rate rises are continuing to apply pressure on finances both for individuals and businesses.
Business across the board are facing increased pressure across their lending facilities as they attempt to service their debt and meet financial covenant requirements.
And as the battle against inflation continues, further interest rate hikes can’t be ruled out. Businesses need to respond by managing their working capital efficiently to ensure they’re making the most of the financial resources available to them and ease cash flow pressure.
Efficient working capital management involves optimising the management of current assets and liabilities to ensure that a company has enough liquidity to meet its short-term obligations while minimising idle funds. This is something turnaround professionals are well practiced at helping businesses with so here, we share some key elements of working capital management to help companies stay on track:
Working Capital Management: What To Focus On
At the core of working capital management is tracking cash and cash needs. It is therefore essential to develop robust cash flow forecasts to anticipate periods of cash surplus or shortage. This will allow for proactive planning and help you to make informed decisions about investments, expenses, and financing needs.
Another key focus should be receivables. The business should have clear credit policies, perform credit checks on customers, and establish appropriate credit terms. Encourage prompt payment by offering discounts for early settlements and follow up on overdue invoices diligently. Remember, a sale is no good until the money is in your account.
Payables is an aspect of working capital management that companies can have some control over. Take advantage of supplier discounts for early payment, avoid late payment penalties and use available credit terms wisely to manage cash flow effectively. It’s also worth speaking with suppliers to negotiate favourable payment terms if possible. By extending payment periods without incurring penalties you can free up cash for other business needs.
Regularly review operating expenses and identify areas where cost-saving measures can be implemented, thereby streamlining operations without compromising the quality of your products or services.
Inventory is one of the riskiest aspects of working capital management due to the fact that holding excessive inventory ties up cash, while insufficient inventory can lead to stockouts and lost sales. But by analysing demand patterns and historical data you can better maintain an optimal level of inventory. There are lots of different techniques for Inventory management such as ABC analysis, Economic Order Quantity (EOQ), or Just-In-Time (JIT).
By using technology, automation tools and financial management software you can streamline your processes and improve cash flow forecasting, accounts receivable tracking, and inventory management. It also helps to reduce manual errors and improve overall efficiency. And while it can feel daunting to implement new systems, it will be worth it in the long run.
If the company has outstanding debt, explore opportunities to renegotiate terms you’re your lenders, seeking lower interest rates or extended repayment periods to reduce interest expenses. Maintaining good communication with your lenders can go a long way to ensuring they are more generous with deadlines, terms and interest rates.
Finally, it’s important to regularly review and refine your working capital management strategies based on changing market conditions, business growth, and industry trends. Continuous improvement ensures that the company stays adaptive and efficient.
By focusing on these activities and being proactive about working capital management, businesses can utilise their financial resources more efficiently allowing them to operate and grow. However, it’s important to understand that working capital management only focuses on short-term assets and liabilities and does not consider the long-term financial health of a company.
Turnaround professionals are experienced in helping companies through challenging times and are able to look at the whole picture to support business both through short term difficulties and long-term growth.
TMA UK is part of TMA, a global organisation that represents the interests of turnaround professionals as its members who have the skills needed to assist companies in challenging times. If you need assistance, please contact our helpline on 0844 804 0116
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