Keeping your company’s cash moving

One of the most critical areas for many businesses during the COVID-19 pandemic has been the availability of cash and accessible cash flows to support the trading uncertainties which all businesses are currently facing.
 
With so many businesses closed or trading on a restricted basis as part of lockdown measures, almost all sectors in our region have been hit hard with interruptions to their cash flow. Business owners who make a concerted effort to focus on the management of working capital can have a real competitive advantage.
 
What are the key factors?
 
At the centre of this management focus is the working capital cycle: the number of days it takes a business to convert its total net working capital (current assets less current liabilities) into cash. Businesses generally try to manage this cycle by selling the things they produce quickly, collecting revenue from their customers promptly, and paying bills no sooner than when they fall due.
 
 What factors cause cashflow issues?
 
There are many other factors which an come into play. These may include:

• Suppliers unable to deliver materials or components, delaying the production process, resulting in extending the inventory days period before output can be sold.
• A reduction in consumer demand leading to increased inventories (or stockpiling) that are difficult to clear.
• Challenges in collecting payment – increased receivable days – within the expected timeframe from customers who may themselves be experiencing cash flow difficulties.
• Encountering difficulties in paying your own suppliers with the potential effect of limiting further purchases of raw materials.

 As companies move to mitigate these issues, further complexities often include:

• The requirement for additional funding to cover extended working capital cycle periods.
• High levels of overdue receivables and bad debt write-offs.
• Weak controls for setting and managing customer and supplier payment terms.

What actions should a business be taking to reduce the working capital cycle?
 
Businesses should focus their attention equally across the three working capital cycle factors.
 
Receivables

• Ensure that invoices are raised promptly and consider offering discounts in return for shorter payment terms.
• Review customer payment terms on an individual basis, adjusting according to risk.
• Monitor your cash collection profile on a daily basis and prioritise customers with large debtor balances.
• Engage with your customers – don’t rely on invoices and emails as your only means of communicating with them.
• Consider investing in new technology to digitise invoicing and invoice chasing.

Inventory

• Shorten your production frequency where possible. This will allow you to place smaller orders, each with their own new working capital cycle (although there may be a trade-off against profitability by way of volume discounts).
• Review stock-in-hand practices by improving accuracy of forecasts, lead times and variability in supply and demand.
• Review distribution and shipping arrangements.
• Review processes for bottlenecks to minimise work-in-progress times.
• Dispose of any slow moving or obsolete stock by offering discounts.

 Payables

• Ensure supplier payment terms are in line with industry standards.
• Use technology to create a robust and timely payment system to suppliers.
• Make sure that payment is made through the most cost-effective payment method (subject to any strict terms).
• Calculate payment terms from invoice receipt date rather than from invoice date.
• Explore supply chain finance and assess value from early payment discounting.

 
How can a business adviser support your business?
 
A finance professional can help you overcome your working capital challenges by:

•  carrying out an initial review to identify both ‘quick wins’ and opportunities for longer-term improvements.
• benchmarking your working capital cycle to compare against your peers’  performance and identify potential opportunities to improve.
• developing detailed action plans for your business, where the dependencies between cash, costs and customer service are prioritised and optimised.
• recommending appropriate technology solutions to ensure that your company is making the best use of the latest cloud-based accounting packages and apps.
• supporting the implementation of sustainable procedures which focus on:
  • optimising your processes throughout your working capital cycles;
  • compliance and monitoring;
  • identification and improvement of commercial terms.