Working Capital Offers an Advantage in Times of Volatility
What seems to be an endless news cycle of uncertain economic headwinds has resulted in continuous corporate strategy refinement and the need for real-time insights into working capital impact. This economic pressure has resulted in a laser-eyed focus on strategic working capital management for CFOs.
In this blog, part of our Value Engineering Series, we’ll look at why working capital programs matter and how they offer a competitive advantage in times of extreme market volatility.
Focus on Working Capital Management
There are infinite reasons why CFOs’ attention is fixed on working capital. Let us begin by summarizing the reasons into four key elements of value:
- Cash Flow: Managing working capital is essential for maintaining a healthy cash flow. CFOs are under pressure to ensure that their companies have enough cash on hand to meet their short-term obligations and continued viability in the long term. The key objective is to shorten the receivable cycle and extend the payable terms. Both objectives are successfully met with a working capital financing program such as supply chain financing.
- Financial Stability: Working capital management protects the long-term financial stability of a company. By optimizing working capital, CFOs will reduce the risk of financial distress and improve the ability to withstand economic shocks. In times of uncertainty, cash is king—those who have it and manage it well are able to not only survive, but thrive.
- Growth Opportunities: Effective working capital management can also free up cash to invest in growth opportunities. CFOs can use the additional cash to fund research and development, launch new products, and expand into new markets or M&A.
- Investor Confidence: Investors pay close attention to a company’s working capital management practices. A company that can effectively manage its working capital is viewed as financially stable and less risky, which can help increase investor confidence. This confidence opens the door to a lower cost of capital that enables overhead cost control.
Liquidity is the lifeblood of an organization and economic pressures strain many organizations abilities to sustain viability without business disruption. There is no better insurance policy for your organization’s liquidity than an effectively deployed working capital management program inclusive of supply chain financing and receivables factoring among others.
The Impact of Rising Interest Rates
But what about interest rates? Does it still make sense to launch a working capital program when interest rates are headed to 5%+ for an extended period?
The answer is yes. With interest rates rising, the impact of working capital management becomes more significant for businesses. There are four key elements to consider as to why this is the case:
- Cost of Financing: The cost to manage a working capital program is less than that of going to the bank for a loan. The cost of borrowing money increases, which means you will have to pay more interest on traditional financing via a bank. Effective working capital management can help you reduce the need for external financing. This will mitigate the impact of rising interest rates on your financing costs.
- Cash Flow: Higher interest rates may result in distressed business partners making it more difficult to collect payments or pay. A working capital program will help ensure viability of your business partners and enhance the relationship by offering them lower cost of capital to meet their short-term obligations.
- Inventory Management: Higher interest rates can increase the cost of holding inventory. Effective working capital management can help companies optimize their inventory levels to reduce their inventory holding costs.
- Accounts Receivable Management: Higher interest rates make it difficult for customers to pay their bills. Effective working capital management will help ensure that appropriate credit policies are in place and that you are collecting payments in a timely manner.
The Keys to Success in a Working Capital Program
Without the right technology solution in place, an effective working capital program will have an extended time to value. The key to a successful working capital program is a one-stop shop to manage all of the corporate liquidity ecosystem inclusive of cash, capital markets, payments and working capital. The sum of the parts is not equal to the sum of the whole.
The additional, often-missed key element to success is a platform that enables accurate forecasting. This is a critical aspect of working capital management. An accurate forecast will help you plan and prepare for fluctuations in cash flow and working capital needs. Working capital management is an ongoing process, and you need to continuously monitor and improve the practices to ensure it is optimized for corporate objectives and needs.
By optimizing their working capital management practices, companies can improve their cash flow, reduce costs, and enhance their overall financial stability.