Ask the Expert – Working Capital: the Cheapest Way to Finance Your Business

Q. I need to cut my debt finance before interest rates rise – what do you suggest?

A. Although debt market conditions may not be quite back to what they were at the peak of the market in 2006/07, they’re not far off.  However, the question continues to be: how long will the good times for borrowers last? As the economic recovery continues to gather momentum here in the UK, central bank support is likely to gradually unwind, seeing interest rates push up once again and increasing the cost of debt finance.

Combine this increased cost of debt with the notoriously challenging period after recession when cash is needed as businesses look to grow again and the danger is clear: this dash for cash can be the difference between significant growth and business failure.  To survive and grow, companies need to be more innovative in their approach to financing activities and for most, the cheapest and easiest way to release cash will be through taking cash out of working capital.

The fundamental principles of working capital reduction are clear: reduce inventory and accounts receivable whilst increasing accounts payable.  Yet many companies find it hard to optimise working capital, despite the clear benefits: increased liquidity that can be used for strategic investments or the reduction of debt.

Across the three cycles of working capital (order-to-cash, procure-to-pay and forecast-to-fulfil), there is an abundance of cash opportunity waiting to be released.  The first thing to do is prioritise cash within the business.  If working capital isn’t really on the agenda, it is going to be difficult to make the real changes to the business you need.  Some changes may require a commercial decision based on cash vs P&L but there are many areas of improvement that stand alone as process optimisation.  How confident are you that you bill as quickly as you can, collect cash as quickly as possible or that payment terms are understood and aligned to standard terms within your business, for example?

To make real, sustainable improvements to the business, it is fundamental to measure and monitor the right metrics with realistic targets to drive the right behaviours.  The result; enhanced profitability due to efficiency improvements within processes and a reduction in cost of capital as debt is offset.  Improving working capital therefore leads to a sustainable increase in Economic Profit / ROCE which results in higher corporate value.

Perhaps it’s time to move cash up the agenda!


Christian Terry

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