How to Increase Working Capital for your Organisation

1. Introduction

Effective working capital management is essential for sustaining financial stability and driving growth. It ensures that a company, regardless of its size or industry, can meet its short-term obligations and invest in its future. In this blogpost, we will explore six proven strategies to optimise your Receivables and Supply Chain Finance (SCF) operations, thereby enhancing your overall working capital management.

2. What is Working Capital and how to Measure it  

Working capital is the difference between a company's assets and liabilities.  

Working Capital = Current Assets − Current Liabilities 

Current Assets include cash, accounts receivable, inventory, and other assets expected to convert into cash within a year. 

Current Liabilities are obligations a company must pay within the same period, such as accounts payable, short-term loans, and other debts. 

Positive working capital indicates that a company can cover its short-term debts and continue its operations smoothly, while negative working capital can lead to financial difficulties and operational disruptions. 

3. 6 Practical Methods to Improve Working Capital

1. Speed Up Receivables Collection

Accelerating receivables collection reshapes the financial landscape, unlocking multiple benefits for businesses, including: 

• Optimised cash flow: Unlock trapped liquidity, reduce days sales outstanding (DSO), and enhance financial agility for a more predictable income stream.
• Improved financial health: Faster sales conversion into cash significantly enhances a company's financial health, enabling reinvestment for growth or debt reduction.
• Enhanced relationships and stability: Strengthening relationships with suppliers, mitigating the risk of bad debts, and reducing the exposure to customer defaults foster stability and reliability.
  

2. Optimise Payment Terms with Suppliers

Optimising payment terms with suppliers is crucial for a company's financial health and operational efficiency. Businesses can negotiate more extended payment periods and explore early payment discounts to better manage their working capital. 

Example: A company negotiates an extended payment term of 60 days with its key suppliers instead of the standard 30 days, providing an additional 30 days to allocate funds for supplier payments, enhancing financial liquidity. 

What are the advantages? This adjustment offers extra cash flow that can be used for operational needs or investment opportunities and may lead to cost savings through early payment discounts.

3. Perform Thorough Credit Risk Assessments  

Risk assessments are crucial in credit risk management, directly impacting the stability and growth of working capital. Customers with poor credit scores may delay or default on payments, which underscores the importance of working with reliable buyers.  

Thorough risk assessments ensure that your organisation collaborates with customers who can honour their payment terms, thereby maintaining and increasing your working capital.  

The credit risk measurement process often varies across organisations but typically involves evaluating the "five Cs of credit": 

1. Capacity: Assessing the customer's ability to repay debts based on their current capital, income, expenses, and debt levels. 
2. Capital: Considering the customer's wealth and profits, including both liquid and non-liquid assets, to understand their financial stability. 
3. Character: Evaluating the customer's credit history, reputation, and current credit score to gauge their reliability and trustworthiness.  
4. Conditions: Examining the circumstances of the credit, such as the purpose of the loan, the amount involved, and the terms of repayment, including interest rates.  
5. Collateral: Identifying assets that the customer pledges to secure the loan or credit, which can be used as compensation if they default.

These factors collectively aid in evaluating credit risk, informing decision-making, and mitigating potential financial risks within the Receivables and SCF functions.

4. Enhance Transparency and Real Time Collaboration 

Conventional communication methods, until recently, often relied on periodic updates and delayed reviews, impacting timelines and stakeholder engagement. However, moving from conventional methods to real-time interaction can significantly improve working capital management.

5. Implement Automation in Financial Processes

Automation is pivotal in enhancing working capital management by simplifying financial processes.  

By leveraging automation, businesses can achieve: 

• Streamlined resource allocation with automated invoice generation, payment processing, and collections to empower staff to focus on strategic initiatives.  
• Significant cost savings and improved operational efficiency as automated accounts receivable (AR) processes reduce manual labor costs and errors. 
• Real-time cash flow insights and improved liquidity through accelerated invoice processing, enhanced collections, and reduced OTC (Order to Cash) cycle. 
• Improved satisfaction and greater payment flexibility from efficient customer interactions facilitated by automated processes.
• Minimised errors and enhanced compliance ensuring data security and regulatory adherence, which contributes to better working capital management and financial performance. 
  

6. Leverage Working Capital Financing Solutions 

Utilising working capital financing solutions provides businesses with immediate access to cash, enhancing liquidity and supporting daily operations. These solutions shorten the cash conversion cycle, reduce reliance on traditional financing, and optimise cash flow, ultimately boosting working capital. 

Businesses can turn to several financial solutions to effectively enhance working capital. Among the most popular options are factoring, reverse factoring, and receivables finance. 

• Factoring involves selling Accounts Receivable (invoices) to a third party (a factor) at a discount, providing immediate cash. This reduces the wait time for customer payments, improving cash flow and liquidity. Learn more about how Factoring can benefit your business
  

• Reverse Factoring involves a financial institution paying a company's suppliers early, initiated by the buyer. This extends the buyer's payment terms while ensuring suppliers are paid promptly, balancing cash flow and maintaining good supplier relationships. For a deeper understanding, check here. 

  
  
• Receivables Finance allows businesses to borrow against their Accounts Receivable, using unpaid invoices as collateral. This provides immediate working capital, improves liquidity and helps them to manage cash flow more effectively. 

By leveraging these working capital financing solutions, businesses can immediately convert their receivables into cash, reduce the wait time for payments, and improve overall financial health. Factoring, reverse factoring, and receivables finance are powerful tools that provide flexibility and support growth by ensuring a steady cash flow. 

4. Choosing the Right Receivables and Supply Chain Finance Software  

Selecting the right Receivables and SCF software is crucial for effectively managing and optimising your working capital. QUALCO ProximaPlus offers a powerful suite of tools to: 

• Speed up receivables collection by automating invoice processing and providing real-time tracking, ensuring faster collection of receivables. 
• Optimise payment terms with suppliers by facilitating better negotiation and management of payment terms with suppliers, allowing businesses to retain cash longer. 
• Perform thorough credit risk assessments through advanced credit risk assessment tools, thus minimising the risk of bad debts and stabilising cash flow. 
• Enhance transparency and real-time collaboration by offering real-time data sharing and collaboration features, improving transparency across the supply chain and enabling informed, strategic decision-making.