IS YOUR WORKING CAPITAL REALLY WORKING? - Releasing much needed cash.

In these uncertain times it is quite clear that cash is king, particularly for SME’s. Releasing the cash that is tied up in your businesses working capital can provide the lifeline you need to get you through.

Running out of cash when banks are being more cautious about lending, could create more business failures than a reduction in revenue streams. Showing your bank a route to profitability that does not generate sustainable cash flow will result in declined requests. Being clear on your working capital strategy, ensuring that you have controls in place, will deliver cash into your business and make this conversation with your bank more successful.

This is not to say that profitability is not important, ultimately you need a path to profitability to provide a certain future and clearly these profits will ultimately deliver cash to your business, but only if this cash is not burnt through inefficient working capital management.

In our Blog of 24th May, we used the analogy of fishermen mending their nets when waters are too stormy to get out on their boats. Ensuring that you regain control of your working capital should be a key focus area. This will help you release urgently needed cash now, which can extend your cash runway. Getting this right will also ensure you tie up less cash in your business when normality returns. This should go hand in hand with your focus on recovering your revenue stream and controlling your costs, but it is often overlooked.

We are sure you already spend time ensuring that your production machinery and other fixed capital is well maintained and operating at full efficiency and that your staff are suitably trained to deliver an effective service. Now is the time to ensure that your working capital is truly working for you.

Attention to this area of your business is also vital to avoid loss. Working capital assets are often risky, particularly in recessionary environments - receivables are at greater risk due to challenges in your customers’ businesses, your inventory could be at risk of dating when your sales have stopped. You therefore need to make sure you are converting these assets into cash as quickly and efficiently as possible.

The challenge in working capital is that in many cases your commitment is being generated well before it appears on your Balance Sheet. If you don’t have the correct processes and controls in place at the right time in your business timeline you will be creating an unseen future cash challenge.

Examples of control gaps that we have seen that have resulted in poor cash generation:

·         A service business where work in progress was not being carried on the balance sheet, as a result this was not being monitored.  As a result of this lack of control, work which could have been billed and turned into cash was not. In some cases this became unbillable due to staff leaving.

·         An FMCG business where poor forecasting processes led to excessive inventory levels. Cash was tied up in unproductive assets, additional storage costs were incurred and the risk of write off because the processes for forecasting inventory needs was poor.

At THE CFO Limited we have over 30 years of experience in managing and improving working capital efficiency. We have helped businesses from small owner run enterprises to billion dollar multi-nationals drive working capital efficiency and implement controls and monitoring to release millions of dollars of cash. Freeing up vital funding for future growth, reducing borrowing or increasing access to further lending.

For a no obligation discussion on how we can quickly help you release cash into your business please contact us at Paul@thecfo.co.nz or 021 684159. We can arrange a virtual meeting during the current Covid lockdown if required.