How to make working capital a priority for your business

The financial landscape has changed enormously since the latest economic recession — and the differences have affected everyone in business, from the smallest startups to multinational corporations.
As easy access to large amounts of affordable credit vanished, businesses quickly realized that they needed to focus their attention on building and maintaining an optimal level of working capital if they were to survive and thrive in the evolving world.
“Simply put, working capital is a measurement of a company’s operating liquidity, or the speed at which a business can convert its assets to cash. Operating liquidity is an important metric in assessing the financial well-being of a business and is particularly important to stakeholders,” says Tom Engler, vice president of the Western Pennsylvania Middle Market at Chase Commercial Banking.
Prioritizing working capital allows companies to make strategic investments, which in turn drive operational efficiencies while reducing overhead, he says. While working capital performance is not the only factor in a company’s success and growth, it’s a very important one, and certainly a good place to start.
Smart Business spoke with Engler about what you need to know about working capital in today’s business environment.
What impact do receivables have on working capital?
Having too many assets tied up can have a huge impact on cash flow. Negative cash can spook investors and shareholders, and cause lasting damage to your reputation.
Actively monitoring working capital is the first step to good financial health. Identify patterns with incoming and outgoing assets and receivables, and align them to levels of working capital. It will become easy to identify trouble spots, such as consistently late payers or invoices that are sitting out for 30, 60 or even 90 days or more.
Also, tighten up on collections. Typically companies don’t like to nudge clients, especially new ones, but it’s vital that you keep the cash flowing in on a regular and prompt basis. This is even more important when you’re working with providers from non-interest-paying markets. In cases like these, consider implementing different strategies, such as capital surcharges, which operate as fees, rather than interest. Segmenting your strategies and aligning them by market will help keep your level of working capital a priority over the long term and improve cash flow in the short term.
How do outgoing payments factor into building long-term working capital growth?
Examine your own payment terms to your suppliers. Negotiating an increase in time-to-pay sometimes is more important than price in terms of managing working capital. When it comes to new contracts, negotiate clear and extended terms upfront, and then work that information into your evolving metrics.
For more established client relationships, managing terms can seem challenging. In these cases, having a straightforward discussion is the best strategy. Put together a plan of terms that would best manage your capital levels and present it to your partner — then work together to find a solution that best benefits both parties.
How does inventory management play a part?
Just as with receivables, having your assets tied up with extra, obsolete, devalued inventory is not only bad for the balance sheet, it’s bad for your company’s long-term health. Although companies often resist reducing inventory — fearing a hit on their ability to manage client satisfaction — having a management system in place is a safe, not sorry, bet.
Include inventory metrics as you map out receivables and payables over a designated period of time. Making this project a team effort and designating a leader to set key performance indicators and measure results is essential, and it will drive cost savings and improve efficiency across your company.

In the end, it’s all about accountability. Making a long-term, strategic plan to prioritize optimal working capital takes a whole team, from the top down. As you baseline your current position, and develop sustained metrics for improvement, you’ll be making a real, demonstrated investment in the future growth and financial stability of your business.

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