Make Working Capital Work For You

When it comes to working capital, every Rand is a soldier, meaning that every cent you spend needs to work hard for you. So how can your company unlock real value from its working capital? Many top performers are changing their day-to-day behaviors to leverage working capital and cultivate a cash-focused culture across the business. Establishing the basics gives companies the best chance of maximizing working capital but requires significant discipline and a shift in company culture. This article will focus on four key strategies that can help your business maximize working capital.

1. Invest in Tech to Shorten the Cash Conversion Cycle
Sending invoices by mail takes too long. By simply invoicing via email, the billing cycle speeds up, resulting in faster collections. Implementing a vendor portal allows businesses to connect and collaborate with their third-party suppliers online, granting suppliers electronic access to invoices and enabling electronic payments. This reduces dispute times and empowers companies to report more promptly, taking proactive steps to leverage supplier discounts or resolve account issues.

2. Ensure Financial Functions Are Optimized
Systems must operate at full capacity to minimize errors on invoices and ensure timely sending. This includes effective follow-ups for collections. Good practices involve negotiating favorable rebates and terms with customers, issuing purchase orders for new orders, and utilizing available volume rebates. It’s also essential to benchmark supplier contracts against industry standards and consistently analyze inventory, considering individual product profitability while offloading any dead stock.

3. Cash Flow Reporting – Making It Visible
To ensure an effective cash management culture, track cash flow visibly each month. A key measure is forecasting, which involves analyzing income and cash flow statements and linking these to your cash flow forecast, focusing on key working capital metrics such as DIO (days inventory on-hand), DSO (days sales outstanding), and DPO (days payables outstanding). Include all capital expenditures, debt repayments, and other cash flows to understand your overall cash flow requirements. Automating your reporting systems can help integrate these with your profit and loss statements and balance sheet, allowing for performance tracking at all levels.

4. Consider Your Cash Flow Obligations
Every business has both short- and long-term cash flow obligations. Short-term obligations refer to daily operational expenses, while long-term ones typically involve capital project requirements and term debt maturities. Effective cash flow management involves matching different funding sources with working capital flows, ensuring cash is available to meet obligations as they arise.

The Bottom Line
During challenging times, cash management is crucial for freeing up cash flow. However, this rigor should not be limited to periods of uncertainty; it should be integrated into the company culture year-round. This approach can free up cash that is effectively trapped on your balance sheets. Ultimately, it requires effective cash management and a shift in thinking, which may involve adopting a more prudent investment strategy or reducing costs across the business. This can lead to increased profitability, greater control, and the flexibility needed to remain competitive.

For information about accessing working capital, call us at 011 217 2880.

‍