4 essential tips for optimising your company’s working capital

Working capital is undoubtedly one of the key elements of sound business management. And with good reason: whilst certain inflows (such as trade receivables and sales of stock) have not yet materialised, certain outflows (such as payments to employees and suppliers) must still be met! 

This inevitable situation creates a gap: working capital requirement (WCR). When this 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 debts. Indeed, as outstanding customer receivables mount up, your company’s working capital requirements increase, with your cash flow inevitably being affected by the amounts owed by your customers.

In fact, optimising accounts receivable is absolutely essential, not only to reduce the company’s working capital requirements, but also to ensure its long-term viability. This optimisation involves minimising 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 check customers’ creditworthiness and deal only with the most reliable ones;
• establish clear terms and conditions regarding payment terms (and, where appropriate, impose shorter payment terms for new customers);
• systematically request advance payments when taking orders in order to finance trade payables;
• optimise the monitoring of customer receivables through a reminder system;
• where necessary, use factoring agreements to sell trade receivables in exchange for a portion of the corresponding cash, which is received immediately;
• offer discounts on commercial bills or credit terms to encourage customers to pay immediately in order to receive a discount.

Please note: Whilst discounts and factoring agreements can certainly help reduce your working capital requirements, they also limit your company’s profitability.

#2 Optimise your accounts payable

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

In fact, as long as they remain in your account, the amounts your company owes to its suppliers reduce your cash flow requirements. Indeed, whilst many companies focus solely on price, favourable payment terms can significantly boost your cash flow.

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

To achieve this goal, there are a number of steps you can take, including:

• negotiate longer payment terms with suppliers (and, where possible, refuse to pay in advance);
• choose your suppliers carefully, giving preference to those with the shortest delivery times;
• optimise the timing of your orders so that you do not receive supplier invoices too soon or too close together;
• avoid paying suppliers early in order to secure discounts.

#3 Optimise your stock management

Your company’s inventory management has a direct impact on its working capital requirements. Distribution, procurement, forecasting, returns management… If all these aspects of your business are not managed properly, your inventory levels can quickly cause your working capital requirements to skyrocket.

In fact, the more your stock levels (raw materials, processed goods, finished products, etc.) increase, the more your company’s working capital requirement rises as well. Indeed, ‘idle’ stock is the worst enemy of your working capital requirement; it is therefore best to operate on a just-in-time basis as much as possible in order to keep it to a minimum.

To reduce stock levels and thereby optimise its working capital, a company can implement various measures, including:

• carry out regular stock-takes to avoid overstocking as far as possible;
• reduce lead times from suppliers;
• speed up the delivery process on the customer side in order to optimise stock turnover;
• optimise stock management (avoid obsolete products, surpluses and “dead stock”) by automating certain tasks and using appropriate dashboards;
• to minimise production lead times as much as possible in order to reduce work in progress. 
• organise, where necessary, special sales campaigns to clear unsold stock (temporarily reducing one’s margin is generally less damaging than increasing working capital requirements too sharply).

#4 Optimise your debt management

Generally speaking, increasing and deferring your company’s liabilities—whether social security, tax or other—helps to reduce its working capital requirements. It is therefore advisable to list all the company’s liabilities in order to identify those whose payment can be deferred without jeopardising the company’s long-term viability.

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

• if you are liable for VAT, opt for quarterly VAT payments;
• If you are a VAT-registered business, opt for monthly VAT refunds.

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

Please note: It is not possible to defer payment of certain business debts, particularly for legal reasons. This applies to wages and tax liabilities, for which late payment could result in financial penalties!

Customer and supplier accounts, stock and debt management… There are many levers you can pull to optimise your company’s working capital requirements. You should therefore always keep a close eye on this fundamental accounting variable which, when managed properly, will ensure a healthy cash flow and long-term business sustainability.