Is your Working Capital working for you?
Businesses are facing headwinds as a result of the current economic climate. Increased borrowing costs, inflation uncertainty and continued supply chain challenges have the potential to greatly impact financial performance of your business and those of your customers and suppliers.
Internal controls and processes should be reviewed carefully to ensure the business can withstand any pressures that may arise from recessionary conditions. Properly managed working capital can significantly reduce trading risk, drive higher margins (or sustain during times of high inflation) and increase free-cash flow generation of the business.
Measure Your Working Capital
There are numerous ratio’s used to track working capital performance. Below are four ratios that are a good starting place. It is important to research benchmark ratios for your specific industry as they can vary significantly.
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Practical Strategies
There is no one-size-fits all approach when it comes to Working Capital management. Bonfire Capital has broad-based experience in advising on corporate finance strategy and transactions valued from less than $5M to $200M+. If you are looking to expand your business, evaluate your capital structure, or explore liquidity alternatives, we are well equipped to assist you.
Buying Controls
Tighter buying controls can reduce inventory on hand without causing stock-outs resulting in lost sales. Conversely, taking advantage of early payment discounts offered by suppliers can significantly improve margins.
Focus on Accounts Receivable
Tightening processes to follow up on overdue AR including, where necessary, stopping or tightening credit on accounts that are stretching beyond standard credit terms can significantly reduce credit risk and improve cash flow.
Stretching Accounts Payable
Taking advantage of full supplier credit terms by excluding payables not yet due from regular payment cycles reduces net working capital and interest expense on the line of credit.
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Engage With Your Lender
Private companies lacking a line of credit can leverage a well-structured working capital facility for effective cash flow management. This reduces tied-up cash in working capital, freeing resources to capitalize on higher growth opportunities.