8 ways to… improve working capital
1 Manage working capital actively throughout the organisation
It’s not the responsibility of the finance department alone. Companies should implement a cash-focused management system, argues Daniel Windaus, a senior director at REL Consultancy, which advises on working-capital issues.
The way to make sure that cash-focused management happens is to use key performance indicators (KPIs) on working capital all the way down the business to operational level.
Ensure that the KPIs are aligned with individual managers’ responsibilities. Cash management should be an active process, linked to improvements in working processes, Windaus says, but making better working capital a company-wide mission takes time.
“Provide awareness training at management level and activity training on new processes at operational level,” he advises. “Changing habits does not happen overnight, so firms will need to provide ongoing support in order to run these processes successfully.”
2 Consider alternative funding
The banks’ unwillingness to lend, especially to SMEs, has put a strain on the working capital of many businesses.
John Alexander, an insolvency practitioner and partner at accounting firm Carter Backer Winter, says it’s best to meet the bank sooner rather than later to increase a credit line.
FDs who’ve had the brush-off from one of the ‘big four’ banks could consider moving to one of the up-and-coming business lenders, such as Santander or Aldermore Bank, which opened in 2009 and has lent more than £1bn to 12,000 small businesses.
But bank loans and overdrafts aren’t the only source of working capital. Firms are turning to asset-based finance such as invoice discounting, while others are harnessing the power of the web to raise finance.
Rupert Honeywood, for instance, raised £71,500 from crowd-funding sites to start his business, the Personal Development Bureau.
3 Pay your suppliers on time
Now there’s a counterintuitive way of improving your working capital. But Clive Adolph, a partner with PBA Accountants, argues that companies that pay on time develop better relationships with suppliers and are in a position to negotiate better deals.
“If you don’t have a good relationship with your suppliers, you could end up not receiving goods when you need them. And, if you can’t fulfil your commitments, that’s not good for your cash flow either,” he warns.
Karen Penney, vice-president and general manager UK for American Express Global Corporate Payments Europe, points out that a new EU directive requires 60-day payment terms for commercial business transactions.
She says that firms can protect their cash flow, while ensuring that their suppliers are paid promptly, by using third-party payment providers. A company can pay its supplier, but need not settle up with its provider for up to 58 days.
4 Negotiate discounts with your suppliers
Firms can benefit from discounts through early payment, bulk supply or regular orders. FDs need to consider what kind of leverage they can bring to each supplier.
One way of driving down prices as far as possible is to ensure that the firm has only one point of contact with each supplier. Sometimes it’s something as simple as making sure the supplier is referred to by the same name.
Jon Asprey, vice-president of strategic consulting at Trillium Software, a data governance specialist, recalls one case in which a company had 70 variants of IBM as a supplier.
“This meant that it was very difficult for the firm to build up an aggregate picture of its total purchasing. That in turn made it harder to identify opportunities for bulk purchasing and discounts,” he says.
5 Make expenses more visible
Even expenses claims with small excess amounts can have a cumulatively negative impact on working capital. The key is to set clear rules in areas such as travel and accommodation – and then to ensure that these are followed.
It is important to have the tools to monitor expense claims without huge manual effort. Penney believes that expense management tools such as corporate card programmes make expenses more visible.
“The detailed reporting helps businesses to see where costs can be consolidated, thereby making forecasting easier and more streamlined,” she says.
6 Manage your stock actively
Holding unnecessary levels of the wrong stock can be one of the biggest drags on working capital. Stock problems often result from a lack of communication among different departments.
Regular (monthly or quarterly) stock checks are part of the answer. But the information emerging from these checks needs to be reviewed and acted upon.
“The reason that most companies shy away from inventory management is because they fear their safety stocks will become dangerously low and they won’t be able to provide the right service level,” explains Hugh Williams, managing director of Hughenden Consulting, a supply-chain specialist.
His solution: analyse revenue and sales of individual products and decide which should be “made to stock” and which “made to order”.
7 Manage the payment process more effectively
Customers will give all sorts of excuses to pay late. One of the most common is an inaccurate invoice, so make accurate invoices a key performance measure for receivables billing.
Bad debts, a particular drag on working capital in tough times, can often be reduced by making more rigorous credit checks on new customers and managing credit limits more carefully.
8 Investigate the benefits of e-procurement
Daniel Ball, a director at Wax Digital, an e-procurement specialist, says firms that have turned to electronic sourcing tools to aid their buying processes have cut costs by an average of 18 per cent. This serves to ease their working capital.
“For example, e-auctions help to create a competitive tension that is often missing in traditional negotiations,” he says, arguing that auctions also make it easier for buyers to negotiate with suppliers across a wider range of issues, such as payment terms.
“You could factor one supplier’s willingness to accept 60-day payment terms against another similarly priced supplier’s refusal to trade on anything other than 30-day terms.”
Ball adds: “The rigorous authorisation process mandated by e-procurement also stops maverick spending – the hidden eater of working capital.”
Illustration: Borja Bonaque
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