6 Tips for Effective Working Capital Management
Rocketing supply chain risks over the last two years have driven many companies to look more closely at how they can optimise working capital, both for themselves and for their suppliers. The challenges have been significant; alongside liquidity constraints and changes to customer behaviour, companies have had to address the difficulties brought by significant supply chain disruption, from factory shutdowns to the semiconductor shortage. At the same time, the trade finance gap has risen to an estimated $3.4 trillion – equating to a considerable funding shortfall for SME suppliers.
Companies facing supply chain challenges and other difficulties associated with the pandemic and the unusual economic patterns must still deploy liquidity with a focus on the most strategic and effective uses. The companies with the ability to effectively extend their payment timelines and selectively pay early to take advantage of surplus liquidity will win during this difficult and uncertain economic environment.
While the challenges facing companies today are considerable, companies that manage their liquidity positions well can plan more effectively for everything from expansions, investments in capacity, M&A activities, stock repurchases, to paying down debt. What’s more, by giving suppliers access to lower-cost funding, companies can also improve the stability of their supply chains and improve relationships with suppliers.
With that in mind, here are some of the ways that corporations can manage working capital more effectively in today’s environment:
- Optimise visibility and forecasting. With a clear picture of their future cash flows, companies are better able to plan their working capital projects – whether that means meeting short-term funding needs, paying down debt, growing the business or funding upcoming capital expenditure. But in practice, many companies struggle to identify even their current cash positions, making it necessary to hold a sizeable cash buffer for unexpected costs. To address this, companies should look for ways to improve visibility – such as by opting for working capital software that integrates smoothly with their treasury management systems and cash flow forecasting solutions.
- Strengthen the supply chain. Suppliers have a clear need for liquidity in the current market – and corporations need to act if they are to keep their key suppliers in business. Solutions like supply chain finance and dynamic discounting can help companies do just that by improving suppliers’ access to working capital. And with many companies looking to move away from globalisation and increase their local sourcing, supply chain finance can also provide a powerful means of supporting local suppliers by helping them access cash earlier in the cycle.
- Look at both payables and receivables. Often companies focus on improving working capital either through their payables or through their receivables. A more effective approach is to focus on both areas to maximise the working capital benefits. Historically, financing receivables was an unwieldy exercise that meant working with disparate programmes run by different banks – but today, there are more opportunities to optimise both payables and receivables via a single, integrated solution. Kyriba, for example, now offers receivables finance as well as supply chain finance, dynamic discounting, and purchase order finance.
- Build sustainability into supply chain finance. With sustainability high on the corporate agenda, companies also have an opportunity to use supply chain finance programmes to achieve their ESG and sustainability goals. For example, companies can incentivise suppliers to meet specific sustainability metrics by rewarding the highest performing suppliers with a lower cost of funding for early payments.
- Choose the right provider. In practice, a company’s banks will often change over time as the business expands into new regions and jurisdictions. It’s important to work with a platform that can grow with your company – for example, by providing access to funding from a variety of different banks. Companies should strive for, and target, working with a well-capitalized and well-established provider with a strong track record in this area.
- Tap into technology. Finally, technology can unveil further opportunities to improve working capital management. Supply chain technology that onboard suppliers automatically and without any friction means that companies can start reaping the rewards of a new programme sooner.
To conclude, in today’s challenging environment, companies are more focused than ever on optimising working capital for themselves and for their suppliers. And from developments in technology to greater opportunities to integrate systems effectively, there are plenty of steps that companies can take to optimise their performance in this area.
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