4 essential tips for optimising your company’s working capital

Working capital requirement (WCR) is undoubtedly one of the key elements of sound business management. And for good reason: while certain cash inflows (trade receivables, stock sales…) have not yet materialised, certain cash outflows (staff salaries, supplier payments…) must still be settled!

This unavoidable situation creates a gap: the working capital requirement (WCR). When it increases, the business may run short of cash, which can then threaten its financial stability.
Here are our 4 essential tips for reducing your working capital requirement.

#1 Optimise your accounts receivable

The majority of business failures are directly attributable to unpaid customer invoices. Indeed, as trade receivables build up, your company’s working capital requirement increases, with your cash flow inevitably affected by the amounts owed by your customers.

As a result, optimising your accounts receivable is absolutely essential, not only to reduce the company’s working capital requirement, but also to safeguard its long-term viability. This optimisation involves reducing as far as possible the time between the order date and the date the payment is credited to the account.

To achieve this, various measures can be put in place, including:

• systematically checking customers’ creditworthiness and dealing only with the most reliable ones;
• setting out clear terms and conditions regarding payment deadlines (and, where appropriate, imposing shorter terms for new customers);
• systematically requesting deposits when taking orders, in order to finance trade payables;
• improving the monitoring of customer receivables through a reminder system;
• where necessary, using factoring agreements to sell trade receivables in exchange for a portion of the corresponding cash, received immediately;
• offering discounts on bills of exchange or early-payment terms to encourage customers to pay immediately in return for a reduction.

Please note: Discounts and factoring agreements can certainly help reduce your working capital requirement, but they also limit your company’s profitability.

#2 Optimise your accounts payable

Although often overlooked by businesses, optimising your accounts payable can nevertheless significantly reduce your working capital requirement.

Indeed, for as long as they remain in your account, the amounts your company owes its suppliers reduce your cash requirements. While many companies focus solely on price, favourable payment terms can give your cash flow a significant boost.

When it comes to trade payables, optimising your working capital requirement therefore involves extending as far as possible the time between the delivery date and the payment date of invoices issued by your suppliers. Of course, these payment terms must be secured while maintaining good relations with your various partners!

To achieve this goal, a number of actions can help, including:

• negotiating longer payment terms with suppliers (and refusing advance payment as far as possible);
• selecting your suppliers carefully, giving preference to those with the shortest delivery times;
• optimising the timing of your orders, so as not to receive supplier invoices too quickly or too close together;
• avoiding paying suppliers in advance in order to obtain discounts.

#3 Optimise your stock management

Your company’s stock management has a direct impact on its working capital requirement. Distribution, procurement, forecasting, returns management… If all these steps linked to your company’s activity are not properly managed, your stock levels can quickly cause your working capital requirement to spiral.

Indeed, the larger your stocks (raw materials, work in progress, finished products…) grow, the more your company’s working capital requirement rises too. Idle stock is the worst enemy of your working capital requirement; it is therefore best to work on a just-in-time basis as much as possible in order to keep it in check.

To limit your stock levels and thereby optimise your working capital requirement, a company can implement various measures, including:

• carrying out regular stock counts to avoid overstocking as far as possible;
• reducing lead times with suppliers;
• speeding up the delivery process on the customer side in order to optimise stock turnover;
• optimising stock management (avoiding obsolete products, surpluses and idle stock) through the automation of certain tasks and the use of suitable dashboards;
• reducing production lead times as far as possible to lower work in progress.
• where necessary, running special sales to clear unsold stock (temporarily reducing your margin is generally less damaging than letting your working capital requirement increase too sharply).

#4 Optimise your debt management

Generally speaking, increasing and deferring your company’s debts—whether social security, tax or other—helps to reduce its working capital requirement. It is therefore advisable to list all of the company’s debts in order to identify those whose settlement can be delayed without threatening its long-term viability.

When it comes to Value Added Tax (VAT), you have two options for optimising your working capital requirement:

• if you owe VAT, opt for quarterly VAT payments;
• if you are owed a VAT credit, opt for monthly VAT credit recovery.

When it comes to social security contributions, quarterly payments are preferable to monthly payments, wherever possible, and always with a view to reducing your working capital requirement.

Please note: It is not possible to delay payment of certain business debts, particularly for legal reasons. This is the case for salaries and tax debts, late payment of which could result in financial penalties!

Accounts receivable and payable, stock and debt management… There are many levers you can pull to optimise your company’s working capital requirement. You should therefore always keep a close eye on this fundamental accounting variable, which, when properly managed, will guarantee healthy cash flow and a sustainable business.