A Guide to Working Capital

This Working Capital Guide was created by Efficio’s team of working capital experts to help you navigate through a myriad of considerations and procedures – both simple and complex – all necessary to successfully overcome working capital-related business challenges faced globally.

The global pandemic has impacted all aspects of the value chain of every company and industry – whether you are experiencing a business increase or decrease.

Challenges and adjustments in our changing world

Our businesses have been squeezed by revenue reductions, such as those imposed by the government guidelines on shop closures that severely affected the retail sector, in particular. Companies are faced with additional, necessary investments to ensure workforce safety, to procure better cleaning services, hard-to-source hand sanitizer and cleaning products, as well as major investment in communications technology to support millions of employees now working from home.

Recent annual reports of listed firms confirm that Working Capital has been a key focus with an improvement of the Cash Conversion Cycle largely driven by Payables (see chart in guide). This has been achieved by tactical short term oriented actions, such as:

1. Delaying payments with suppliers or re-negotiating extended payment terms, when possible
2. Ensuring client invoices were timely issued and payments collected accordingly (dash for cash)
3. Applying for tax deferrals and other financing schemes put in place by governments
4. Recurring to short term debt to ensure liquidity, at expense of reduced long-term investments for growth

These actions enabled short term survival, but firms now will face mid and long-term challenges to honour the deferred payments whilst also having to finance their day-to-day operations.

All this in an environment where revenue might not necessarily be at the same pre-crisis level whilst the need for increased supply chain resilience adds pressure on working capital requirements.

EBITDA versus Operating Cash Flow

A vast majority of organizations have been focused – and incentivized – entirely by EBITDA. This usually means working to increase revenue or reduce costs, while maintaining service levels.

However, EBITDA is only a single indicator. To develop a full picture of the health of any given company, a number of measures must be taken into consideration. Many organizations are failing to realize greater financial outcomes that can be achieved by leveraging working capital improvements. While the benefits from reduced cost usually take a year or more to deliver, working capital gains can be achieved almost immediately and with relatively little effort.

On the supplier side, the most obvious method of improving working capital is to increase payment terms so that cash remains in the business for longer. Here, the benefit can be realized almost as soon as the next run of invoices is processed. Instead of paying suppliers after 30 days, they are paid after 60 days, creating immediate and significant improvements to cash flow. On the customer side, the most obvious method of improving working capital is to ensure invoices are being paid duly. Here, the benefit is almost immediate: unpaid invoices will be converted in cash faster.

Reducing working capital 

All optimization of working capital has a positive impact on cash flow. However, working capital is influenced by almost the entire value chain, so any changes that are made can have a correspondingly complex impact. In general, a reduction in working capital is almost always based on the acceleration of transactions, production processes or cash flows.

Download the full Working Capital Guide to read more about:

• Key factors impacting short-term cash flow
• A summary of UK, German, Italian, Spanish and US government measures, provided to relieve financial pressure in the economy
• Extensive Accounts Payable and Accounts Receivable checklists, designed to help guide your accounting practices through the pandemic and beyond to successfully overcome working capital-related business challenges faced globally in the era of COVID-19.