The recovery from the financial crisis of 2008 barely got going before we were talking about a sovereign debt crisis in Europe. Nevertheless, stock markets rose and economic indicators started to head in the right direction from around November 2011.
Now that’s morphed into an oil price slump, precipitated in part by a slowdown in emerging markets; most notably China. If the experience of the last few years tells you anything, it’s that there are always challenges to be overcome.
In our last blog in this series, we touched on the various ways you can ensure your organisation is in good shape – ready to withstand the tailwinds from global economic change.
In this piece, we’ll focus on working capital management: why it matters, signs it could be more effective and ways it can be optimised.
Why working capital is important
No matter how well your business is doing on paper, if you you’re not managing working capital efficiently it could be your downfall. Essentially, it makes sure you have access to enough cash and liquid assets to see your company through the short-term.
It’s tempting to think of working capital as a finance issue. But the reality is it has roots right across an organisation’s operations. For that reason, it’s an indicator of efficiency levels throughout your business. And, while it can be the largest investment made by an organisation, it can also be its least productive – hence, working capital can be used as a measure of efficiency.
At the same time, it can be a very useful tool. Working capital is one of the few areas that can deliver significant cash to a business in a relatively short period of time. It offers flexibility too, removing the pain and time required to achieve a large change or restructuring programme, and is the least expensive source of cash within an organisation.
When there’s room for improvement
The tell-tale signs that your working capital management could be tightened up are manifold. The first, and perhaps most obvious, step is to benchmark the amount of cash you have tied up in working capital compared with competitors.
Stock holding is another key identifier. If you have excess buffer stock, proliferation of stock levels spread across multiple sites or a supply chain so complex it leads to a culture of stock build-up then you have a working capital management issue that needs addressing.
Look to your supplier base too for any indicators. If they are pressuring you for more timely payments or you are failing to harness consolidation and pricing opportunities among your suppliers, then it could be managed better. Likewise, high or deteriorating debtor days and increasing levels of bad debts being written off, suggest more could be done.
The last pointer is cash flow; specifically a lack of cash flow visibility and accountability for cash. If there are inconsistencies in cash flow management between different subsidiaries or divisions within your organisation, they too will suggest there is a wider issue to be dealt with.
How to fix it
Identifying an issue with working capital management is one thing. Doing something about it is another. If you recognise any of the signs outlined above in your business, we suggest taking some or a number of the following actions:
- Ensure senior accountability and operational responsibility for working capital management;
- Be proactive in all areas of working capital management, from sales forecasting through to cash collection;
- Prioritise attention and effort through ongoing segmentation of customers, suppliers and inventory;
- Use a short term cash flow forecast as a proactive management tool, not a retrospective measure of cash;
- Set cash and working capital targets – monitor them using a combination of simple KPIs and cash calls;
- Focus on the day-to-day and not just the period end.
Those are just a few of our suggestions. For an in-depth discussion on managing your working capital please get in touch.
You may also be interested in:
The Deloitte business health check – five measures to make sure your business is fighting fit
Oil and Gas Reality Check 2015
Get ready for SRIT part I: what does it all mean?
Get ready for SRIT part II: four steps you can take ahead of April 2016