Rethinking Your Approach to Working Capital

By Generational Equity

03/07/2017

You’ve consistently got plenty of cash to cover payroll and keep the lights on, so how your business handles working capital must be fine, right?

Not so fast. A recent report by the National Center for the Middle Market, Working Capital Management: How Much Cash Is Your Business Tying Up?, found 75% of middle-market executives thought their company did a great job of managing working capital but the reality was very different.

The report surveyed 400 middle-market leaders with financial authority and found most companies had significant opportunities to put their money to better use in the critical areas of cash management. Those areas were:

• Days receivables outstanding
• Current inventory levels
• Days payable outstanding

“We found that in every industry, top-performing companies manage working capital up to four times better than their below-average peers,” the NCMM said.

The report suggests that by collecting receivables more quickly, paying bills slower and holding less inventory, middle market businesses could free up millions of dollars annually. That money could then be used to invest in growth opportunities, R&D or infrastructure, all of which makes your company more agile and more competitive, and ultimately more attractive to potential buyers when you decide to exit.

If you haven’t benchmarked your company’s standards for working capital against industry peers, especially publicly traded companies, it’s time to do so.

As you refine your approach to working capital, you will need to balance relationships with vendors and customers, and analyze the capabilities of your accounting department. But given the potential upside, the extra effort is worth it.

After all, a business that meets its expenses, pays off debt and avoids expensive short-term financing is more attractive to potential investors.

To learn more about the basics of working capital, try these links:

• What is working capital?
• Working Capital Cycle: How healthy is your business?
• What can working capital be used for?

By Jessica Johns Pool.

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