Corporate Finance

Working capital management

There remains a level of stagnation and uncertainty for many Northern Ireland businesses, highlighted by a number of recent business failures. These provide a timely reminder of the importance of managing cash flow; working capital management is the process of managing short-term assets and liabilities so that a firm has sufficient liquidity to run its operations smoothly. Effective working capital management is critical to protect businesses against market downturns or supply chain disruption.

Liquidity is often tight in small businesses due to the scale of their operations. In particular, small companies may find access to external funding to be expensive or even elusive.  A focus on working capital can be a cost-effective source of funding and one which is often overlooked by management teams. The phrase “cash is king” is often mentioned in business forums but it takes a proactive business to embed a culture of regular cash flow review.

Robust daily or weekly cash flow forecasting will help ensure that you understand the cash flow of the business and, perhaps crucially, detect challenges which may lie ahead.

A business should also investigate and understand available sources of financing.  Invoice discounting and supply chain financing are typical tools utilised by businesses to fund working capital.  The cost of these facilities will reflect the risk involved but tend to be lower priced than leveraged loans or mezzanine finance.

There are many ways to ensure the business unlocks funds from its own working capital for short-term requirements, such as:

Monitoring of stock – employing a ‘just-in-time’ stock process will ensure that cash is not unnecessarily tied up in inventory, although care must be taken to avoid stock outages which may affect future sales and reputation.  The sale of obsolete stock will also reduce stock levels and release cash.

Accelerating customer payments – discussions with large or late paying customers, offering discounts for early payment can help with short-term cash flow.

Keep an eye on credit control – reviewing customer’s accounts may identify potential future issues for collection and allow for a quick resolution.

Working with suppliers – negotiating increased credit terms with suppliers may be a temporary option but should be carefully managed to ensure there are no long-term consequences for the relationship.

Monitor payment mechanisms – ensure supplier invoices are only authorised for payment when they fall due. Often, companies don’t realise that they are not taking full advantage of negotiated credit terms.

Delay discretionary expenditure as required – ensure that any money leaving the business is necessary for the sustainability of the business. 

These are some examples to help achieve immediate improvements for short-term funding.  Incorporating these processes, tightening controls and instilling the discipline of managing working capital into the workforce can have a dramatic impact on the cash position, allowing the business to fund growth projects via longer-term finance options.