Building resilience with strong working capital management practices

The financial impacts caused by economic volatility, supply chain disruptions and labor shortages, to name a few, can reveal the degree to which even well-capitalized companies are vulnerable to unanticipated shocks. The good news, however, is that weathering these challenges is well within the reach of many companies. The real challenge and opportunity is having enough liquidity at the ready to be able to respond as conditions change.

The key to safeguarding your liquidity is leveraging the right resources and digital tools, and to identify and mitigate the risks threatening your working capital position. This might entail having your sales team partner with finance to assess the cash position of your top 20 customers, or having more frequent conversations with your financial institution about the latest cash management solutions.

As you plan to sure-up your working capital management practices, here are four critical strategies to consider.

1. Conduct more cash flow analysis using cross-functional teams

Ongoing uncertainty can potentially impact cash flow and working capital management for extended periods of time. For instance, an outcome of the pandemic has been pent-up demand for a variety of goods and services. However many companies are having difficulty satisfying the demand because of labor shortages and supply chain disruptions. That coupled with other potential obstacles, such as inflation trends and a rising interest rate environment, means that companies are developing forecasts in unprecedented circumstances. Companies should consider whether the effects of the uncertainties are short-term or long-term and how that determination will affect their estimates.¹  It’s important to note that historical patterns may not materialize in a year in which there’s a great deal of disruption

Not only should you monitor cash flow more frequently than in the past, but you should also share this information across your organizational silos through more coordinated communication. What insights can the sales team provide? Are there new customers in the pipeline or unexpected opportunities to end discounts with existing customers who aren’t likely to leave if you do. Sharing such information is vital to forecasting accurately and proactively planning for fluctuations in working capital.

2. Adjust your payment and collection practices

To avoid a potential liquidity crunch, ask A/P to pull together a list of the most strategically important vendors and examine the payment terms in place. Is your company on good terms with these vendors? Is there room for negotiation? Perhaps they can temporarily adjust your payment terms. Rather than 60-day terms, for instance, they might be willing to accept net 90 or net 120 with a 10% deposit. Your banker may be able to help as well. They could tell you whether any of your vendors are accepting credit card payments. Alternatively, they might identify new vendors that accept credit cards that weren’t on your radar previously.

Card payments can save your vendors considerable effort and time in back-office processing while instilling a greater sense of confidence that they’re getting a payment that won’t bounce. Meanwhile, your company gets to enjoy a 30-45-day float until the card payment is due.

When it comes to A/R, accepting electronic payments from your customers is an absolute boost to your working capital position. In those instances when accepting a check is the only option, however, consider depositing them using your bank’s mobile app to speed the flow of cash into your account.

Supply chain financing is also growing in popularity, as solutions such as “reverse factoring” allow buyers and sellers to accept more favorable payment terms. More specifically, buyers get to extend payment terms while sellers collect payments quicker, with a financial institution serving as the intermediary.

3. Improve bank account and cash flow management

It’s not unheard of for a company to do business and hold deposit balances with several banks. This may impede clear oversight due to decentralized bank accounts and reporting, excessive account documentation. Additional complexities and inefficiencies can arise from highly manual payments and receipts processing.

This is exactly why treasurers must engage their bankers to review their company’s bank account structure and learn about new digital solutions that can close potential gaps and reduce inefficiencies. They need to ensure they’re leveraging the right cash management solutions to help optimize working capital and understand their liquidity.

Your bank likely has a wealth of tools that you can leverage to better anticipate trends that could affect your cash flow. These may include mobile apps to help you keep tabs on your cash flow balances and working capital position using a smartphone, and online reporting and forecasting tools.

For accounts payable, consider making more payments electronically, rather than by check, as well as solutions that will allow you to automate the cataloging of invoices for better analysis. You may be able to create further efficiencies by integrating your accounting or ERP system with bank applications.

4. Optimize the technology you already have

Many companies may not be in a position to purchase new IT systems. However, there’s no denying that technology is essential to effective working capital management.

To bridge this gap, proactively look for opportunities to work more closely with IT. This new partnership will provide a holistic view of the company’s IT systems and better equip the organization to identify productivity-killers that can be fixed using your existing resources. Automating outdated A/P tasks and A/R or streamlining enterprise resource planning (ERP) could liberate teams to focus their energy on higher -value tasks.

Of course, implementing critical technology should always be an option. But before committing to the additional capital expenditure, enlist a cross-functional team to examine and exhaust all of your internal IT solutions.

_{[1] Deloitte, Financial Reporting Alerts, Financial Reporting Considerations Related to Inflation, Supply Chain Disruptions, and Labor Shortages, December 2, 2021.}