Visibility into working capital is essential to manage cash flow and ensure a business can remain sustainable, yet research shows that companies frequently miss quarterly working capital forecasts by up to 23%.[1]

Organisations must address this inaccuracy as a matter of urgency, as working capital is a measure of the operating liquidity of an organisation and is critical in every industry.

Without a clear picture of your organisation’s current and future financial position, it’s very difficult to make optimal decisions about cash on hand, lines of credit, investments, and other factors critical to achieving business objectives.

Businesses need to optimise internal processes, which can rein in operating costs and improve cash flow. Essentially, this means finding ways to automate processes wherever possible.

Research shows that 71% of Australian companies have visibility into their 60-day cash position, but only 8% of them have real-time cash visibility. The same study also found that this lack of real-time visibility and predictability of the cash situation is due to these not having appropriate cash management processes, systems or tools in place.[2]

There are a number of ways businesses can improve working capital. These include:

• Automating processes: The first step organisations can take to automate their accounts payable processes and improve the visibility of their cash position is to capture invoice data as soon as invoices are received. More than 50% of invoices are still received in paper format, and more than a third by email, so it’s critical that the information on these invoices is captured at the time of receipt, rather than at some later stage in the process.[3]

• Activating workflow: Capturing invoice data earlier lets organisations establish an automated workflow system to bring down the cost of processing and paying invoices. Aberdeen Group has calculated that best-in-class organisations with automated invoice systems average 4.1 days to process an invoice from receipt to approval. That compares to an average of more than 16 days for a manual invoice process.[4]

• Establishing connections with virtual card providers or payment aggregators: Virtual card providers or payment aggregators are ‘payments-as-a-service’ providers, which give organisations access to credit facilities, streamlined processes and payment terms from the banks to pay suppliers. These providers can improve an organisation’s days payable outstanding (DPO) metrics. Financial institutions provide a virtual card to businesses as a secure payment mechanism for online business-to-business transactions.

• Consider a different lender: The big four banks can be unwilling to lend at times, particularly to SMEs, as they can be perceived as a higher risk. This can be a constant source of pain to a business, particularly if they have an unexpected expense they need help with, only to meet with intransigence from their lender. It is worth considering doing your business banking elsewhere, perhaps with an up-and-coming lender that is more receptive to the needs of small businesses and more willing to extend a line of credit in such circumstances.

• Drive a hard bargain with your suppliers: One of the most obvious ways to increase your working capital, but one which can often be overlooked, is to negotiate discounts with your suppliers. They will usually be receptive to giving you a better price if you offer them some sort of incentive in return, such as buying in bulk or settling your invoices early. It is also best, when dealing with a supplier, to have a single point of contact and to know that person on a first-name basis. That way, you can establish a relationship and make negotiations that bit easier, as opposed to dealing with a different person during every interaction, which makes establishing that type of relationship much more difficult.

• Establish greater control over stock levels: Managing your inventory more effectively means you won’t eat into your working capital by ordering and holding onto additional stock that you don’t need. Regular stock checking can address this potential problem.

• Use an e-procurement tool: Using e-procurement for acquiring goods or services is a good way of saving money, as it creates a competitive environment amongst suppliers, which usually leads to you getting a significantly better deal. 

• Collect from customers as soon as you can: Slow payers can have a detrimental impact on a company’s cash flow, so impose a timeframe for payment and offer customers discounts for prompt payment.

• Monitor your balance: When you have significant cash outlays, always make sure that you have the necessary inflow of funds at those times to be able to cover the outgoings.

Better management of working capital is critical for business success. CFOs must prioritise cash flow strategies. Technology is a key mechanism to help businesses achieve this.

About the author

Matt Goss is managing director, ANZ, at Concur. He is a management executive with extensive experience in establishing and managing operations for cloud-based technology companies.

References

[1] Working Capital: Successes, Challenges, and 2012 Objectives”, The Hackett Group, Inc.

[2] The 2014 Visa Cash Flow Visibility Index study

[3] Institute of Finance and Management, 2016

[4] “AP Invoice Management in a Networked Economy”, Aberdeen Group, May 2012