01. Performance

Balancing risk in the pursuit of profit and strong cash flow

In 2021, working capital and cash flow management will demand close attention. For many operators, significant investment in new stock will be required to support higher activity levels. The ability to self-fund may be compromised by increasing cash burn as revenues lag costs and JobKeeper payments end.

Critical and regular assessment of demand patterns will be vital to avoid over-stocking and unnecessarily locking up cash in working capital. The use of technology will also be key to managing this and driving greater efficiencies. From the shift to ecommerce, to automating processes to accelerate reaction times, and accessing data to inform decisions around product mix, pricing and terms, technology will provide a key competitive advantage for businesses.

Businesses with a high concentration of suppliers and customers were also found to be most at risk of COVID-19 disrupting their operations. Building resilience across the working capital cycle will require a quick evaluation of alternative sourcing options, reassessment of sales reach and distributor strategies, and identification of new customer opportunities, channel shifts and emerging markets. In adopting this approach, the challenge for management teams in 2021 will be in balancing the need to diversify to reduce risk to an acceptable level while also pursuing profit restoration.

From a legislative perspective, the new Payment Times Reporting Framework that came into effect on 1 January 2021 will have an impact. This framework will require businesses with turnover of over $100 million to report biannually on their payment terms and practices for their small business suppliers (those with turnover under $10 million). For all the benefits the new legislation is expected to bring, it will add an additional layer of complexity to business compliance and reporting. With increased transparency around payment behaviours, businesses that meet the reporting criteria will need to assess existing supplier terms and the impact any changes in the payment cycle may have on working capital and cash flow this year.