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Working Capital

Protect your cash position in times of uncertainty

Recent high profile business failures highlight the importance of effective working capital management in protecting businesses against unforeseen downturns or disruption in the supply chain. Given the current level of uncertainty in the UK, and globally there are some short-term levers that can be considered to address sudden cash flow pressure.

An increased focus on working capital continues to provide the most cost effective source of funding. However, our annual Working Capital Study finds that large corporates are experiencing a 1.2% increase in working capital year-on-year. This suggests that in dealing with a number of competing priorities, it has been pushed down the priority list.

Smaller businesses, where access to external funding is more difficult and expensive, have had to sharpen their focus on cash management. Improvements of 4.2% year-on-year demonstrate the fact that smaller businesses (who are more used to dealing with shorter-term cash flow challenges) are more agile and can react faster.

Irrespective of your level of maturity around working capital management, here are tactical moves which can be taken to manage short term cash flows in the case of the unforeseen.

Understanding your cash flows

Understanding your cash flows

We often talk about a ’cash culture’. The cornerstone of successfully embedding this culture is ensuring that the finance and senior management team regularly review and discuss cash flow and operational drivers.

Embedding a robust daily or weekly cash flow forecast as well as accompanying reporting and review processes will ensure that you understand your cash flows. You can then quickly spot issues and challenges in order to react in an agile manner.

Crucial to understanding your cash flows is understanding your current and available sources of funding. Solutions such as supply chain financing or invoice discounting may be available, and both are widely used to gain certainty of cash flows and provide funding of working capital requirements. The availability and cost of these facilities will typically reflect the perceived risk in your supply chain. This means that the suitability of this as an option will depend on your specific circumstances, but it is worth discussing with your lenders and advisors.

Tactical cash flow levers:

Once you understand your cash flows and short-term requirements, we recommend immediately exploring the following three themes:

1 Are you complying?

There is often opportunity through ensuring you are complying with your standard processes (which is not always the case!). Areas to consider include:

  • Targeted approach to collection – use knowledge of customers to review accounts receivables ledger and identify current or potential future issues for short-term collection. You can then escalate issues quickly to drive swift resolution
  • Raise and issue all customer invoices - review orders not dispatched or unbilled WIP against contractually agreed dates to ensure all invoices are raised at the earliest possible opportunity
  • Eliminate early payments – ensure supplier invoices are not authorised for payment in advance of the negotiated due date. We often find that companies anecdotally believe that they do not release early payments when it happens often in reality

2 Support the process

Less tactical, but there may be some amendments you can make to internal processes to support short-term cash flow requirements:

  • Instill cash focus to customer orders – ensure your commercial organisation are aware of the increased focus on cash, and work with them to prioritise customer orders that optimise short-term cash flows, without negatively impacting longer term profitability
  • Delay non-critical purchases – review your order process and ensure commitments aren’t being made that could be delayed to free up cash
  • Liquidate obsolete stock - identification and sale of obsolete stock to quickly reduce inventory levels and release cash flows

3 Commercial relationships are key

The more difficult area to address, but where you have strong relationships with customers and suppliers, consider talking to them. You can effectively explain your situation and the value for them as a key stakeholder. Often many are willing to support, either in the short or longer term to improve cash throughout the supply chain. Points to consider are:

  • Customer payment acceleration - identify your large, and/or late-paying customers and work with them to discuss the opportunity to swap discounts for early payment in the short term, or reduce negotiated payment terms in the short term to support with short-term cash flow requirements
  • Request support from suppliers - work with your strategic suppliers to understand their appetite to support by offering longer payment terms, even if only temporarily. This is one of the obvious levers to pull, and many do so without full consideration of the longer-term consequences. As such, this lever needs very careful management to ensure you are not simply passing on cash flow challenges or provoking an adverse reaction from suppliers where they withdraw terms due to credit concerns  

The above are just some examples of the cash levers which can be pulled to help achieve immediate improvements to address a short-term need. The type and magnitude of issues faced and the impact on your perceived credit rating will dictate which levers are suitable. Knowing which ones are available and when to pull them is key.

Businesses can take a proactive approach to managing working capital, driving consistent processes based around an understanding of best practice and tighten controls and improving transparency. This will be transformational on your overall cash position and build resilience to the unknown. 

Long-term sustainability remains the ultimate goal for many - a topic we’ll be covering in our next publication in spring 2018.

Contact Mark O'Sullivan to find out more.