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Working capital optimisation – how a data driven consultative approach can unlock opportunity

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Whatever your size of business or sector you operate in, working capital optimisation is one of the pillars of success. Michael Wilding, Relationship Director at HSBC UK, shares his thoughts on the challenges businesses face when it comes to working capital and the best strategies and approaches to overcome them.

“Working capital optimisation has always been important for businesses, but there’s been increasing focus on it certainly over the last 15 years or so, intensified by the heightened level and frequency of external events that disrupt business,” says Michael. “Whether that’s interruption of trade flows, COVID-19 or Brexit, this flurry of events has intensified business’ need to focus on the fundamentals – and working capital is key.”

Not managing working capital effectively can lead to a whole host of issues, from hampering a business’ capacity to trade, to reducing its value – potentially impacting any exit strategy – or its ability to pursue its strategic objectives, whether investing in transformation or expansion, de-leveraging or pursuing acquisitions. Even with an awareness of these potential issues, businesses can face challenges in effectively managing their working capital, but there is therefore also an opportunity for businesses in optimising working capital.

Getting an accurate picture

Whilst acknowledging that many of the challenges will be unique to a particular business or sector, Michael points out that there are common themes that emerge. “Frequently, it comes down to businesses not being able to effectively monitor their working capital and its impact,” he says. “Without visibility, understanding how different elements of the working capital cycle interact and perform is virtually impossible. It’s also important as a business grows to ensure you’re capturing the right information and feeding that into your analysis.”

It’s a challenge that can be magnified in larger businesses, particularly with multiple locations across different geographies or those that have grown through bolt-on acquisitions, where systems may remain disparate and decentralisation has led to a lack of visibility and control or even an increasing use of non-standard payment terms.

Generating buy-in

Ensuring and maintaining internal engagement is also important, says Michael. “Within a larger business, there are many different functions that will play into the overall optimisation of working capital. The purchase to pay element will be affected by Procurement, for example, your inventory by Operations, and the debtor cycle by Sales. It’s easy for these areas to be focused on their own, sometimes contrasting, objectives, but aligning these can make a real difference.” Regular reporting on these objectives and performance at monthly management or board meetings can help consolidate that buy-in and ensure that all areas of the business are aligned with the overall objective of optimising working capital.

Unlocking the opportunity in your working capital is a balancing act, with it being important to consider what’s achievable, the potential impacts and cost implications of addressing different areas, and balancing with other priorities with regards to developing sustainable relationships with suppliers or clients, or trying to drive increased profitability.

Michael Wilding | Relationship Director, HSBC UK

Data-driven focus

When it comes to addressing the challenges businesses face, there are both operational improvements and financial solutions that they can make to optimise their working capital. The most important thing, says Michael, when considering the best approach, is to be driven by the data. “Ensuring that you have access to timely, accurate and robust data of how you’re performing across the working capital cycle, as well as having a robust and rolling 13-week cash flow forecast is crucial. You can then analyse that data, taking into account historic performance (what’s improved, what’s changed) and benchmarking it against your peers (are you outperforming or underperforming your industry/sector average). This can help identify areas that either require improvement or are opportunities to release cash tied up in working capital.”

Identifying those aspects of your working capital cycle that need attention is only part of the process, however. “Unlocking the opportunity in your working capital is a balancing act, with it being important to also consider what’s achievable, what the potential impacts and cost implications are of addressing different areas, balancing with other priorities with regards to developing sustainable relationships with suppliers or clients, or trying to drive increased profitability. Incremental improvements across a number of areas could release more cash, for example, than a more revolutionary move, and there may be relatively quick wins such as harmonising terms where the same supplier is used across multiple sites or ensuring that payments are made in line with agreed terms, as well as more structural changes like segmenting suppliers or clients or re-negotiating payment terms”

A needs-based approach

In addition to operational changes, there are a number of financial and non-financial solutions that can help with both the efficiency of working capital management and its optimisation. “Our approach is purely needs-based, so beginning with an open and consultative discussion to build an understanding of a business’ unique position and its challenges and then building out a solution to address those challenges and support the business’ longer-term objectives.”

Typical solutions range from overdrafts and revolving credit facilities to trade or foreign exchange solutions such as invoice finance, guarantees, or forward contracts, equipment finance for those businesses with high capital expenditure needs and card programmes to support payment terms. “Different solutions align with different working capital challenges, in particular elements of each of the working capital cycles, and can help to mitigate risk, improve liquidity or visibility and control of cash,” explains Michael, “which is why tailoring an appropriate holistic solution is so important.”

With the need to forensically collect and examine data so crucial, tools that enhance a business’ visibility and control can make a real difference. “Innovative solutions such as cash flow forecasting tools have enabled greater automation to help identify potential working capital challenges and therefore, the need to optimise,” says Michael. “Online platforms that provide real-time, 24/7 access to all accounts and provide a constant picture of global liquidity are the cornerstone of effective cash management, driving the data businesses need to be as effective as possible when it comes to prioritising working capital optimisation.”

For more information on solutions that can help you optimise your working capital, visit https://www.business.hsbc.uk/en-gb/corporate/capability/working-capital.

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