Understanding a business’s working capital cycle and its components is essential to understanding its cash flows. However, management teams often underestimate the complexities involved, particularly when their business is growing. 

Effective working capital management begins with clear and robust invoicing, collection, purchasing and payment procedures. Without these, businesses may potentially lose sight of the costs associated with funds being tied up in working capital rather than being converted to cash, which can include unnecessary increases in overdrafts and borrowings, capital raisings, and asset sales to sustain cash flows.

In our experience, many businesses rely heavily on their treasury and finance functions to manage working capital. However, in reality, many of the steps in the working capital cycle are controlled by other areas of the business, including the sales teams, warehouse and distribution, inventory management, quality control and customer service. By not aligning the controls, processes and staff incentives across the entire business there is a growing risk that debtors are not collected on time, inventory builds as it does not change with sales demand and creditors are delayed to compensate growth in debtors and inventory. This can be a slippery slope to business failure.

We can provide an assessment of each of the components of working capital and work with management to better understand their interaction with other parts of the business. In addition, we set targets and initiatives to reduce working capital and improve cash flows, effectively acting as a “drumbeat” to ensure change is implemented. We achieve change through structured regular meetings with staff, to discuss the priorities and actions for improvement. We develop concise “dashboard” reporting, assist with setting targets and initiatives and can monitor and assess ongoing performance.