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Companies are, sooner or later, facing an economic downturn or maybe we already entered into it. Depending on how well prepared a company is and what strategy is used, this can be used as a business opportunity.

To maximize the possibility to come out stronger on the other side, companies must both optimize the cost structure and also secure access to capital and a good cash position well before the downturn starts.

Securing access to capital will be key to enable your company to keep evolving in times when profits are under pressure and the overall flow of cash is reduced. It will allow you to continue with strategic investments, enforce creativity and new ideas, maintain or even gain competitiveness while securing a solid foundation for the future.

Read more: Can a stagnation and recession be used as a business advantage?


Start looking within the company itself

Depending on the industry, company set-up, ownership or financial status, capital can be more or less hard to access but, a solution possible for all companies at all times, is to start by looking within the company itself. Would it be possible to release cash already at your disposal but tied up in your own operations?

Managing your working capital, i.e. the capital required for running your operations (Accounts Receivables, Inventory and Accounts Payables) more efficiently, can release cash and give you just the financial strength to continue to evolve. Why not utilize this opportunity to secure your future liquidity?

How to manage your working capital?
  • Invest in leaner processes securing more efficient capital turnover
  • Make use of the situation to negotiate better terms with your customers and suppliers
  • Utilize bank offers to finance the supply chain
  • Find effective financing options for long lead times in order for your company to be better prepared for a more difficult future.
 

Insights on working capital management projects

  • Working capital optimization is an operational initiative, not a finance project.
  • Management of working capital requires a cross functional approach. Optimizing individual working capital components separately can endanger the supply chain and customer deliveries.
  • The project manager must be capable of making the whole organization committed.
  • Hands on training and individual coaching are essential in ensuring sustainable results and buy-in throughout the organization. Incentives alone do not work.
 
Illustration from a real life project: typical key areas

Recession-processes-and-change-areas

DSO = Days-sales-outstanding
DIS = Days-in-stock
DPO = Days-payables-outstanding

Do you want to know how much cash you can release based on your net working capital areas? Find out and request a free analysis of your company and your competitors net working capital:

Request a Working Capital Benchmark

 

Working capital management – the best way to support growth

Great working capital management is the most efficient way of supporting one of the most important goals in today’s businesses, i.e. growth. Growth requires capital and the more efficient you are the less injection of capital is required. In addition, one of the cheapest ways of financing growth is to release already financed capital by reducing your net working capital.

More benefits with working capital management

There are of course also other benefits with efficient working capital management:

  • By reducing the capital required to run your operations, the overall value (expected return of capital) will increase
  • The possibility to access external capital is enhanced by improved short term financial health
  • The financial risk-level is reduced by control of bad debt and obsolete stock, correct estimation of sales and management of the supplier stock
  • Control of the working capital also require control of the core processes in a company which ensures efficient operations

 

Working capital optimization is about lead time reduction

In its essence, working capital optimization is about reducing lead time. Reduction of your lead times will:

  • Improve your operational efficiency
  • Increase the service level in your offering
  • Increase the flexibility and;
  • In the process, help you identify risks and increase the business sense in your organization.

This also means that creating a sustainable change in working capital will require more than good analysis and financial knowledge. It’s about real change in the way people work and do their everyday job and thus require experience to achieve. Based on our experience from the latest recession we can see that it is not only companies with their balance sheet in good shape that come out stronger. It is also of utmost importance to optimize lead times, build a flexible supply chain, forecast quality as well as being able to respond and adopt quickly to changes in the market and/or the environment.

 

Summary

Market changes of high impact tend to happen faster and faster in the modern economy and so is the case also with working capital. This is a reminder to constantly keep on your toes because even companies in quite good shape can very soon end up in a negative spiral with increasing stock, customers not paying on time, suppliers requiring shorter payment terms and higher amounts reserved for non-moving stock or uncertain accounts receivables.

To summarize, give your company the best possible opportunity to evolve during a recession by:

  • Securing access to capital in time
  • Starting internally to utilize the potential already available
  • Improving internal financial efficiency to gain from synergy effects in other areas

Here's an excellent hands-on eBook for you how to execute a working capital optimization project. Download the eBook by clicking the image below: 

How to execute a working capital optimization project

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Authors

Peter Bäckius joined Capacent (Sweden) in 2019 and has 26 years of global work experience of which 11 years as procurement and management consultant, 7 years as self-employed and remaining 8 years in executive line organizational positions covering most areas within Operations (SCM, Sourcing, Working Capital, Indirect Material, Direct Material, R&D, Production).

Sara Thelin has been with Capacent (Sweden) for 6 years, starting as an analyst directly after graduation from LiTH (Linköping Institute of Technology) and now working in Capacent’s Operations practice. Sara has long experience of working capital optimizations projects with a high focus on implementation and change management.

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