Working capital management is one area under scrutiny as CFOs and business leaders strategize about how best to position their companies to weather cash flow challenges.

Working capital — the difference between current assets and current liabilities — rarely gets the same attention as items that impact a company’s bottom line. However, this metric is clearly worth your time: The more cash that’s tied up in working capital accounts — including unpaid invoices and unsold inventory — the less money you’ll have to pay operating expenses, pursue growth opportunities, repay debt and distribute profits to investors.

The COVID pandemic has laid bare how vital working capital can be when it comes to surviving upheavals, large or small. Those businesses that had the greatest liquidity were best equipped to deal with the many hurdles the pandemic created — in addition to simply covering their short-term operating expenses and debt obligations.

Here are three steps to consider to reclaim control over working capital. They target three balance sheet accounts: 1) inventory, 2) accounts receivable and 3) accounts payable.

1. Prioritize working capital management. When companies lose focus on working capital it can have adverse consequences. Examples abound. For instance, when you don’t have enough inventory on hand, customers may turn to your competitors, perhaps permanently. Conversely, excess inventory items may become damaged or obsolete. Likewise, as receivables age, the likelihood of write-offs increases. And, when you pay suppliers and vendors late, you may forego early payment discounts — and delayed payments can eventually compromise supplier relationships.

Effective working capital management is a balancing act that requires continuous monitoring. Customized dashboard reports can help you access real-time data, communicate improvements, and identify and fix problems. It’s also important to establish financial incentives related to working capital to help your management team realize that high performance means more than just maximizing profits.

2. Leverage available technology. Cash management software and other technology solutions can help track working capital. In many situations, companies don’t have to invest in new technology, rather they simply need to use existing technology more effectively.

Are you taking full advantage of the tools and features included in your current software? Talk to your IT staff and software vendors to solicit their suggestions on how you can incorporate elements like automation features in your inventory system to reduce costs through predictive inventory management or in your accounting system to expedite accounts receivable tasks. Similarly, automated payments to your vendors can help you obtain discounts for early or digital payments.

3. Take a cross-functional approach. It’s mission critical to break down the functional “silos” at your company when developing working capital strategies. CFOs need input from multiple departments — including operations, sales, procurement and IT — to formulate accurate projections.

For example, co-workers outside of the accounting department can provide insight into a major contract that’s expiring, a new product that’s being launched, a delayed shipment of parts or materials, or the bankruptcy of a key supplier. In turn, these developments could impact your company’s working capital plans. Always keep your eyes and ears open for operational changes in the pipeline and ask people in other departments for feedback on your plans.

We Can Help

To achieve true financial stability and long-term profitability, you must pay closer — and broader — attention to your working capital. Contact us for help developing a holistic view that proactively manages inventory, accounts receivable and accounts payable.