By Claire West
Nearly 20 years of experience in the corporate finance market means Richard Sanders, a partner with the leading adviser to mid market businesses, Catalyst Corporate Finance, has been through turbulent times before and seen first hand the strategies that have ensured businesses can come out of the other side of the downturn fitter, leaner and better able to compete. One area he sees businesses make huge strides is in working capital management and here he shares his views with Fresh Business Thinking.
“One thing I have learned is that extended periods of success have tended to breed complacency in businesses and disciplined business practices are often not as rigidly applied throughout the organisation. Difficult trading times such as these are an opportunity to challenge behaviours and to strive to find areas for improvement. One such example is working capital management.
“Firstly, it is important to put this in context — every £1 reduction achieved in working capital is effectively £1 more in the shareholders’ pockets and it should not be seen as a benefit having large amounts of stock and debtors on the balance sheet.”
If stock and debtors are not tightly controlled this often leads to issues with: stock obsolescence particularly in the retail space where stock turnover can be high as seasons change; bad debts through a variety of reasons; and inefficiency — just handling and storing large amounts of stock makes picking and storage far more complex.
There are many ways of tackling this, such as:
• Look at rationalising your product range — you will probably find that 80% of your sales are derived form 20% of your product range — it might be that the additional 20% are not particularly profitable and could release significant cash;
• Can you pass more risk on to your suppliers through the use of consignment stock, reducing lead times or stretching credit periods in exchange for consolidating your supplier base;
• It might sound strange to be proposing investment in technology but I have often seen very short pay backs in areas such as wastage from implementing smart technological solutions;
• Stock wastage — are your control procedures strong enough to prevent stock loss, something that often creeps up in harder economic times;
• Revisit your management information system — is it providing you with data that allows you to measure areas that drive cash and hence act upon them. Many businesses management accounts can become too burdensome, losing focus and it is not unreasonable to change the focus of your MIS reflecting changing economic times;
• Look to minimise your future commitments — can you buy in smaller more regular quantities without making significant impacts on your margins?
• Many businesses will be sourcing from overseas and the combination of increased freight costs, high inflation in the Far East and the hidden costs of funding stock on the water might mean that it’s economic to look at sourcing at least some product form closer to home. I have clients that have UK supply sources for short run short lead time batches, with Eastern European suppliers utilised for medium term mid volumes and the Far East for larger commodity purchases that can be bought ahead with greater certainty.
Whilst some of these may not apply to you, all I can do is recount other experiences — one particular aerospace client of ours, having faced the fall out of 9/11 and the SARS outbreak in the Far East believed they were managing working capital effectively. However, faced with fresh concerns over the medium term trading they have revisited their working capital and identified at least a 20% reduction in the capital tied up here. For many business that could mean the difference between survival or failure.