As the Recession Bites - Working Capital is Vital
Most businesses like to plan ahead mainly focusing on setting targets and monitoring performance for sales growth, cost control and profit improvement, however the Management of Working Capital is often missed from the plan.
In these times of credit crisis, trying to monitor and improve sales and profit performance may be difficult and suddenly Working Capital becomes vital. Yes, it is still important to control costs, but if the business is experiencing falling demand for its products and services, or pressure to lower prices, then “Cash is King” and the importance of control over working capital (stock levels, customer debts, amounts owed to suppliers and bank facilities) comes into sharp focus. Peter Boothroyd, a partner at Saint & Co Chartered Accountants said: “In such difficult times strong management of working capital can make the difference between success and failure, particularly with the tightening credit lines available from the banks. Even a profitable company can struggle to survive if the working capital is out of control”.
STOCK LEVELS
Reducing stock requires careful analysis to identify slow-moving / surplus items and attempt to turn those into cash. At the same time re-order levels need to be reviewed to see whether certain lines can be reduced or discontinued – could a “Just-in-Time” policy be adopted? Care is needed here to ensure that the business can still react to customer demands and not get caught without stock and lose the trade.
CUSTOMERS DEBTS
Tightening up on credit control and customer payment terms also needs careful consideration and is unlikely to be resolved overnight. It is important to handle this steadily, systematically and sensitively to avoid losing customers. However there is a point when slow payers may become uneconomical if profit margins are being eroded by the cost of the money outstanding, the time and effort to collect it or both.
PAYING SUPPLIERS
Finally the possible impact of slightly relaxing the time taken to settle suppliers’ invoices needs to be considered. Deferring payment for too long may cause undesirable reactions from suppliers – they may perceive you to be a poor credit risk and reduce your permitted order levels, or consider stopping supply. This could cause a problem when trying to accommodate your own customers on time and force you to pay higher (non-discounted) terms to obtain the supplies.
IT’S A BALANCING ACT
Peter continued…. “Strong Working Capital Management can have a dramatic effect on the cashflow of a business, but behind it lies some careful planning and control to achieve the best results – in short it is a ‘Balancing Act’ and businesses need to take time to control and manage their working capital to help survive in these difficult trading conditions”.
For further advice and assistance on Working Capital Management please contact Peter Boothroyd on tel: 01228 534371.
