Cash Flow Game Changers: 5 Key Insights to Help You Unleash Working Capital

Cash Flow Game Changers: 5 Key Insights to Help You Unleash Working Capital

The business ecosystem’s unpredictability is compounding at an astounding rate.

New competition appears every day, technology is driving rapid innovation and businesses struggle to stay afloat. The median life expectancy of an ASX 500 company is now only 10 years (Australian Institute of Company Directors).

Companies are now aware that cash is crucial to funding innovation and growth, placing them in the best position to compete in this new world.

The mechanisms for cash management have historically been fragmented with the Sydney Morning Herald estimating that some $8 Billion is locked up in receivables in Australia.

“Small businesses acknowledge that their biggest cash flow concerns due to late payments are the ability to pay suppliers (38%), the ability to pay staff (15%) and declining profitability (24%)” – Xero Accounting Software.

Below we shine a light on how companies now have the environment to rethink how they can optimise cash positions across their own operations, and underpin strategies to drive their competitive advantage.

1. Find common ground and understanding

With many variations of names given to working capital, it’s critical to get an understanding of what it actually is. Working capital simply is “the cash required to run your businesses” on a day-to-day cycle.

Companies are focused less on profit and loss as a key indicator, and more increasingly on the balance sheet in an understanding that in this modern landscape, the strength of a company’s hard cash position is paramount in driving effectiveness.

2. Revisit and align the end game

It’s a term that is often abused, but owners without a clear set of goals will not succeed in implementing a working capital strategy.

Not all companies are cut from the same cloth. Companies vary not only in cycles of maturity but also in stages growth.

Setting goals can be looked at like this:

  • Businesses with a need to unlock cash:

An obvious strategy would be to extend payment terms and at the same time use some form of invoice financing product to ensure that suppliers can still be paid within terms.

  • Companies with a need to obtain a return on excess capital:

In instances such as this, Dynamic Discounting (DD) is utilised, where the operation takes advantage of its own cash to pay the suppliers early while securing a discount on early payments and increasing internal margins.

  • Companies with a mandate to use external debt sources to increase returns:

Certain businesses understand the benefits of sourcing debt capital to make large supplier payments through trade financing programs such as purchase order finance. In these situations, funding is raised against confirmed orders to pay suppliers with the end customer (buyer) invoice/s reducing the debt without repayments.

This frees up operating cash flow and increases margins on orders as equity is used to fund other activities.

3. Create strategies that result in a win: win

Businesses are both a buyer and a supplier, and management understands that the success of their suppliers is directly tied to their own success.

The cash flow strategies that are being engineered involve improving the working capital positions of buyer and supplier across the entire supply chain. Buying operations are now able to take advantage of lower cost of capital and make it available to their suppliers, and in turn, utilise early payment on receivables, creating liquidity on both sides of the supply chain.

4. Embracing technology to enable change

Historically businesses worldwide have invested billions of dollars in systems to improve physical supply chains, financial supply chains, the way they get paid, have remained largely untouched with paper invoices, manual inefficiencies, and limited financing tools.

Whether a company’s goal is catered towards unlocking working capital or increasing returns for excess cash flow or both, technology can play a significant role in a number of critical ways:

(a) Today cloud accounting platforms can analyse the data from millions of suppliers exchanging billions of dollars in invoices, together with third party data to understand what receivables and payables are actually trading at and what they are likely to be in the future.

Supply chain funders can use this information to reveal what the real potential is for companies looking to gain higher yields on working capital through utilisation of their own funds or external sources (off balance sheet).

(b) Technology providers are now working hard to solve the collaborative issues facing supply chain now. New platforms across the U.K and U.S, including new ones in productions such as StakIQ, can also be used in a way that enables us to finally reach out to an offer earlier payments or fund larger orders to all the suppliers in a supply chain through one unified network.

(c) Finally, technology can be used to automate onboarding of suppliers, buyers, and financiers thanks to cloud technology. Business is well on the migration path to placing all of their financial data online, either through traditional accounting platform or enterprise resource planning systems (ERP’s).

5. Become the yardstick for others

A lot of businesses owners or management teams are resistant to change, a culture that drives incremental losses that erode the bottom line.

Assessments across DPO, DSO and other relevant metrics are needed to drive measurable, incremental improvements in your cash position. If you have lazy capital on the balance sheet, you need a scalable way to get a return on cash. If your DSO is lagging you need a solution to close down gaps and direct capital to most efficient or profitable areas of the operation.

If your approach to the team is correctly crafted, you will be surprised at how quickly you can gain buy-in for any working capital initiatives.

It’s important to gain trust, show benefits and ultimately a clear path to the improved supplier/buyer relationship and profitability.

See if Stak can help with your supplier payments.

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We regularly share our thoughts on trade finance, lending, company culture, product strategy and design.

Stak works with clients that sell to some of the largest buyers in Australia & overseas.

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