This article was originally published on 16 November 2023. The article was republished on 14 March 2024.

• Strong liquidity and working capital management could create additional cash flow
• How a business approaches the key factors affecting their working capital (accounts payable, inventory, and accounts receivable) has an impact on how they could thrive#
• Clarity and insights into your overall working capital structure could ensure you are better placed to react in times of uncertainty
• A business that maintains positive working capital is likely to have the flexibility to invest in growth or mitigate risk
• Using supply chain and inventory data to assess working capital requirements can help businesses develop a smart deposits strategy

As businesses continue to face headwinds on many different fronts, adopting a strong cash mindset could make a difference to future strength and resilience.

Finance teams need to keep a clear view of how much cash is on hand to maintain sufficient working capital to cover liabilities and contingencies, and take advantage of opportunities to thrive.

If you’re scrutinising your operational efficiency and whether your business possesses sufficient liquid funds to meet short-term obligations, it helps to understand what factors affect your cash position. 

All teams make decisions that ultimately impact short-term cash flows. Whether it’s purchasing, sales, finance, or treasury, what conversations are happening around accounts receivable, inventory, and accounts payable? And could there be opportunities to free up cash and implement efficiencies enterprise-wide?

During the pandemic the profile of many markets changed, which had a knock-on effect on the speed at which companies needed to be paid. This altered the terms on which some businesses were willing to trade.

In today’s challenging environment, it's still important to explore contract terms with suppliers. Is your buying function managing your supply chain relationship in a fair and balanced way? You might not want to leave it too late to pay your suppliers, for instance, in an environment where demand is affected by cost-of-living pressures. Or you may wish to pay early because your supplier might be in greater need than you are. Could these scenarios impact working capital optimisation?

Payment timing matters. Depending on which sector you’re in, you possibly don't want to be paying earlier than everybody else because then you've got to find more money to fund your working capital.

On the other hand, you don't want to be paying later than everybody else and risk damaging your relationships with the rest of your value chain.

Managing risk is essential, particularly if you have an international supply chain. How can you ensure that what you’re buying is what you're getting? During the pandemic, trade instruments such as documentary collections and letters of credit came into play as they offered greater security to both buyer and seller. Through these instruments, banks effectively guarantee that the company’s money is secure, or that goods ordered will arrive or else the money is refunded – effectively confirming that both counterparties are good for the money.

Companies with high amounts of working capital possess sufficient liquid funds needed to meet their short-term obligations.

In some cases, very high working capital may indicate that a company isn't optimising its excess cash, or that it's neglecting future growth opportunities in favour of maximising liquidity.

When a company has low working capital, it may mean the business is struggling with barely enough capital to cover its short-term expenses. 

It’s important your business has enough inventory on hand to fulfil orders, but not so much that you have too much working capital tied up in your inventory. Consider these questions:

• Is inventory building up because demand is slowing?
• Are your buyers taking too long to pay invoices?
• Are you paying bills earlier than you need to?
• Holding a lot of material in stock on elongated terms may not always optimise working capital with interest rates as they are – could your portfolio of stock need rationalising?

Another inventory option is to try for more operational efficiency by buying ‘in case of-need’. If you need something quickly and you have built rapport with your suppliers, this is where you might see that good supply chain management policy discussed above paying dividends.

By being more efficient you could also reduce some of the costs of warehousing, and some of the energy from the obsolescence of the supply. 

Where costs are increasing, or where there's a change in market dynamics, cashflow tools and forecasting are important. Although your working capital cycle is unlikely to be entirely within your control, there are specially designed tools that businesses could use to get a better sense of customer behaviour. Holistic planning could also guide finance teams to ensure they’re matching daily requirements of cash, along with long-term strategic investment.

Maintaining good financial health is not just about recording incomings and outgoings, but also about using accurate forecasts to plan with as much confidence as possible.

Questions to consider:

• Should you pay down debt early so you're reducing your costs?
• Should you conserve cash for a rainy day?
• Could you place surplus cash in a deposit that might yield more return?

Through close collaboration across your business functions, you can best understand your future outlays and receipts. You could then build a multi-tiered approach to investing your cash to potentially maximise its value from a blend of instant access options to longer term deposits.

Bear in mind there are different business savings accounts, depending on whether you want instant access to your cash or if you’re happy to lock your money away for a set period. Criteria apply.

With accurate forecasting, for example, you could establish how much cash might you need over the next three months and if there’s some you might not need for 90 days, say, could that generate interest in a deposit?

Perhaps you’re in a position where you don’t need the cash for a year or so – you have no plans to invest in new premises or acquire another business - you could explore deposit options that generate an even better return.

With today’s volatility, managing cash effectively may protect you in times of crisis as well as underpin business growth. It pays to focus on maximising cash flow, tighten forecasting approaches, build a positive cash culture, and keep communication channels open.