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Be opportunity ready – how working capital optimisation can help you achieve your goals

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Optimising your working capital isn’t just about better business management. It can unlock a number of opportunities and could deliver real benefits, as HSBC Relationship Director, Michael Wilding, explains.

Optimising working capital could provide business benefits across the short- and longer-term, but one potential benefit straddling both timeframes is that it speeds up the time it takes you to generate cash from your normal operating activities. In the short-term, that gives you increased liquidity to be able to cover your day-to-day expenses and ensure that your business continues to run effectively. Longer-term, it can support the delivery of strategic objectives.

Helping you maintain growth

Optimising working capital, can help reduce the potential risk from over-trading. If you're a fast-growing business, and you’re focused on increasing your profitability by driving up turnover/sales, possibly through preferential payment terms, you run the risk of detrimentally impacting your working capital. Optimising working capital and releasing additional cash into the business can give you greater flexibility and help you maintain that level of growth. If you don’t, you can risk over-trading and essentially running out of cash.

It’s especially pertinent as we start emerging out of the Covid-19 lockdown, where businesses might be anticipating a period of high growth and are keen to return to the turnover/sales levels they saw pre-Covid. But it’s equally true for businesses operating in fast growing sectors or those that have identified a niche or specialism that they’re keen to maximise.

Unlocking long-term business goals

If we look at the longer-term benefits of optimising working capital and releasing cash, it can unlock a variety of opportunities depending on the aspirations of different businesses. It can help, for example, with deleveraging. If you perceive that your debt levels are higher than you’re comfortable with and you’re keen to reduce the costs of servicing that debt and improve your credit rating for example, optimising your working capital could be a good opportunity to generate additional cash to pay down the debt and, therefore, deleverage the business.

Optimising working capital can also help you raise additional capital and, of course, cash released from working capital is the cheapest form of capital. If you can achieve that through basic efficiencies, then you’re clearly not incurring any costs in terms of interest or arrangement fees. This additional capital released from optimising working capital can help you self-fund transformation such as digitisation, or explore international expansion.

Stakeholders are all focusing heavily on cash and, at a more granular level, on working capital. They want to see that you are managing it well and you're optimising where possible, so if you do nothing, you’re effectively moving backwards.

Michael Wilding, Relationship Director, HSBC UK

Being opportunity-ready

For businesses keen to pursue an investment agenda through capex or those considering acquisitions, demonstrating a robust approach to optimising working capital can help fund these aspirations. In addition, those businesses that have a clear strategy of monitoring, measuring and optimising their working capital can present a more attractive proposition for investment. As we emerge from the pandemic, we can certainly expect opportunities for businesses in sectors that have fared well or those with strong business fundamentals to pursue growth through new clients, new markets or acquisition.

On the other side of the coin, but playing to the same sense of good business management, is the impact optimising working capital has on business value. If you’re looking ahead to a possible exit strategy, improving cash and free cash flow for the business could ultimately help improve business valuation. And even if you’re not focused on an exit strategy, improving the value of your business is important. We’re seeing an increased focus on working capital from stakeholders, whether that's suppliers, customers, partners, investors, credit rating agencies for the larger listed businesses, analysts, and so on. Stakeholders are all focusing heavily on cash and, at a more granular level, on working capital. They want to see that you are managing it well and you're optimising where possible, so if you do nothing, you’re effectively moving backwards.

Solutions to support working capital cycles

There are a number of ways that businesses can optimise their working capital, from operational steps to solutions that support the three primary working capital cycles: purchase to pay (creditor), forecast to fulfil (inventory), and order to cash (debtor). Guarantees, for example, can potentially help you obtain better payment terms or even open account terms, and vastly improve your purchase to pay cycle. Purchasing or corporate cards are another possible solution that can help by extending that purchase to pay cycle. Global liquidity solutions, for example, a single-view online platform such as HSBCnet or a cash concentration solution can also support working capital optimisation by increasing access, visibility and control, particularly for businesses with multiple entities or an international footprint.

Whether to provide a buffer in the face of potential shocks, such as Covid-19 or Brexit and help mitigate risk, or to drive core business benefits in the short-, medium-, or long-term, monitoring, managing and optimising your working capital should be seen as both protection and opportunity.

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