Question

In: Accounting

What methods can be used by a superstore to manage its working capital?

What methods can be used by a superstore to manage its working capital?

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Expert Solution

What exactly is working capital? In simple terms, this is the difference between a business’s short-term assets and short-term liabilities. Put another way, working capital represents the difference between what the firm owes and what it owns. Without sufficient working capital, a business simply won’t have the cash it needs to fund daily operations and future growth.

Now that we’ve established the importance of working capital, let’s look at a 9 ways in which it can be improved.

  1. Maintaining working capital is everybody’s responsibility.
  2. Pay suppliers on time.
  3. Control expenses carefully.
  4. Watch your stock.
  5. Consider introducing e-procurement.
  6. Talk to alternative lenders.
  7. Emergency loans can be a short-term solution.
  8. Asset-based financing can be an asset.
  9. Invoice factoring and discounting releases the cash tied up in your sales ledger.

1)

  • Many businesses rather short-sightedly imagine that working capital is solely the remit of the finance team. Far from it. To succeed, a company should implement KPIs on working capital that is understood by everyone in the management team. Where necessary, specialist training should be delivered so that everyone shares the same outlook on financial management.

2)

  • At first glance, this suggestion may appear strange: surely paying as late as possible will improve a company’s working capital? However, suppliers who are paid quickly and who do not have to waste time chasing invoices are likely to be more flexible when it comes to prices and terms of business.
  • Effective negotiating is central to every business, and it makes good sense to assign each supplier a named contact who can build a close and mutually respectful working relationship.

3)

  • In a large company, it can be tempting to ignore small expenses. This is extremely unwise, as they can mount up significantly and substantially affect the business’s working capital. Setting clearly understood rules for travel and entertainment can make all the difference, while the introduction of a corporate card program will allow management to view expenses in depth and quickly take remedial action where employees are bending the rules.

4)

  • Excessive stock holdings can tie up huge amounts of capital. Overbuying frequently results from poor communication between departments and can be mitigated by monthly or quarterly stock checks, provided they are quickly followed up with remedial action. At the same time, it is crucial to avoid stock shortages, so this is something of a balancing act, requiring careful attention to each product line.

5)

  • E-procurement can reduce costs substantially: one survey indicated savings of 18 percent when businesses used e-auctions and carefully compared different suppliers’ terms. Choosing suppliers with longer payment terms can represent a huge boost to your working capital, so it is worth carefully examining the small print and negotiating wherever possible. E-procurement also involves a rigorous authorization process, which can assist in reducing unexpected expenditures and protecting your working capital.

6)

  • Bank overdrafts can be a good way to manage shortfalls in your working capital. However, they traditionally represent a moderately high risk for the bank and hence attract substantial interest rates. Your company may be able to negotiate far more advantageous terms with an alternative lender, who can offer you a choice of emergency loans, asset-based finance, and invoice factoring and discounting.

7)

  • Emergency loans are an excellent way to address sudden shortfalls in working capital. As the name suggests, speed is of the essence and a lender can give you the financing you need in less than 24 hours.

8)

  • With asset-based financing, you can borrow against the value of your premises, plant, and equipment. This is a longer-term method of financing, with competitive interest rates as the loan is secured on an asset.
  • In many cases, alternative lenders will use a panel of providers for asset-based loans, enabling you to negotiate the most competitive rate and the most appropriate repayment period–whether you want to make a quick repayment to reduce the total interest or spread the loan over a number of years to reduce your monthly outgoings.

9)

  • Invoice factoring or discounting enables you to borrow up to around 85 percent of the value of your invoices as soon as you raise them. You then repay the loan, as well as interest and charges, once your client has paid you. Choose factoring and the finance company takes ownership of your debtor ledger and deals with all aspects of credit control. Their expertise will probably mean faster payments and hence lower interest charges.
  • However, you may wish to keep control of your own debtors so that your clients do not find themselves dealing with a third party. In this case, you should choose invoice discounting, which simply provides the financing against invoices.
  • However, you choose to address the issue, maintaining sufficient working capital is crucial if you want to stay in business. Make the right decisions and you will have the cash on hand to pay your staff and suppliers, take on additional orders and new clients, and most importantly invest in the future growth of your business.

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