Effective working capital planning is important for every business, especially those experiencing growth. As sales increase, so does the cash needed to cover inventory, payroll and other operating expenses while waiting for customers to pay their invoices.
Unpredictable markets, rising costs and changing interest rates can add even more pressure to cash flow. For growing businesses, keeping a close eye on short-term assets and liabilities helps ensure cash is available to support daily operations and meet financial obligations.
Here are six ways to strengthen your working capital planning and better manage your business's cash flow.
Businesses have several options for cash forecasting, from spreadsheets to off-the-shelf and customizable software. Many of these tools also incorporate artificial intelligence (AI) capabilities.
These tools can help financial managers analyze customer data, project cash flow and evaluate different scenarios over periods ranging from a month to a year or longer.
Choose a tool that fits your business and use it consistently to identify potential cash shortfalls before they become problems. Update your forecasts as customer payment patterns, operating costs and sales expectations change.
The most useful forecast is one that reflects your business's current financial position and operating conditions.
Getting paid on time is essential to maintaining healthy cash flow. AI and analytics can help businesses improve collections by identifying payment patterns and highlighting opportunities to make processes more efficient.
Consider these strategies:
Managing accounts payable effectively can help you preserve cash while maintaining strong supplier relationships.
Start by negotiating favorable payment terms with suppliers. Then look for opportunities to manage or stabilize costs.
For example, many of our maritime customers use strategies to fix or hedge expenses such as fuel costs. A business with a contract to move 10 million tons of freight might estimate its fuel needs over the contract period and purchase a block of fuel at a fixed price. In other situations, companies may use financial derivatives to hedge certain costs and reduce their exposure to price increases.
Treasury management tools, such as integrated payables, can also help streamline payment processing and make it easier to take advantage of early-payment discounts.
Inventory ties up cash that could otherwise support other business needs. Analytical tools can help you monitor customer demand and forecast inventory requirements, making it easier to manage stock levels, improve inventory turnover and free up cash.
Review inventory regularly to identify items that are slow to sell or expensive to store and maintain.
If the cost of holding certain inventory becomes too high, selling it at a discount may be a better option than continuing to carry it. Although accepting a loss can be difficult, recovering some of that cash may help improve your overall working capital position.
Tracking key financial metrics can help you identify potential cash flow challenges and determine where adjustments may be needed.
One important measure is the cash conversion cycle, which shows how long it takes a business to turn its investments in inventory and other operating expenses into cash collected from sales.
Monitoring this metric over time can help you spot emerging issues. Look at changes alongside your accounts receivable, accounts payable and inventory levels to understand what's affecting the cycle and where you may need to take action.
Your bankers monitor this metric and other indicators of financial health. You should make them part of your regular business reviews, too.
Regular communication with your bankers is especially important as your business grows and its financing needs change. Sharing information early gives them more time to understand your situation and evaluate potential options.
Let your bankers know when a development could affect your working capital. For example, tell them if your largest customer changes its payment terms or if you introduce a new strategy to convert inventory into cash.
Explain how the change affects your cash flow and what steps you're taking to address it. Keeping your bankers informed helps them better understand your business, anticipate your needs and evaluate financing options when appropriate.
Working capital needs can change as your business grows and market conditions shift. Regular forecasting, careful management of receivables and payables, and open communication with your bankers can help you stay prepared for those changes.
Need help evaluating your working capital needs? Talk with your Hancock Whitney banker about cash forecasting tools, treasury management services and financing options that may support your business as it evolves.