Navigate today’s economic challenges with effective working capital strategies: a comprehensive video series

How to cope with recent and current economic challenges – the ever-changing, unpredictable demand and supply landscape – has become increasingly critical to businesses. One of the most significant issues has been supply-chain shocks that result in shortages and disrupt business as usual. Across most industries, we are now seeing excessive inventory levels and the inefficient use of capital.

To make matters worse, interest rates have reached – and are set to remain at – high levels, making borrowing more expensive and therefore limiting the funds that are available for day-to-day operations. This tightening of financial resources has left many companies in a precarious position, struggling to maintain liquidity in the face of rising costs.

In addition to these financial constraints, companies are also struggling with service payments on their rising debt. As debt becomes more expensive to service, the pressure on cash flow increases, forcing companies to carefully prioritize their spending. That’s led to a greater focus on cost management, with many organizations taking stringent measures to control and reduce spending wherever possible.

In the face of these complex challenges, strategic working capital management is proving to be indispensable. It’s how companies can maintain effective procurement operations and ensure their financial health.

For the effective management and optimization of working capital, it’s crucial to first create a clear starting point – to ensure full transparency about the status quo. Detailed clarity on procure-to-pay and order-to-cash performance – as well as inventory management – is essential from a working-capital perspective.

It’s important to define key performance indicators, or KPIs, to measure the current situation, and track progress. The use of live dashboards, supported by AI, can help considerably with the monitoring and visualization of these KPIs. Then, comparing performance against industry benchmarks, and setting specific targets, will help organizations to understand their relative progress and identify areas for improvement.

Continuously monitoring that performance, and also making the necessary adjustments to strategy, is essential to achieve sustainable success. Concrete implementation measures should be defined for the key areas of inventory management, payment terms and general cash management.

Effective inventory management begins with the creation of a robust data model that enables the identification of critical SKUs and excess stock.

Such a model should ensure a clear overview of stock levels and provide information for effective decision-making. Advanced analytics can be used to derive optimal re-order points and safety stock levels, given specific lead times for items. That will ensure efficient inventory management and help avoid both stock-outs and overstocks.

The use of industry-proven supply-chain management and resilience tools – as well as targeted measures, such as broker sales – will optimize working capital by ensuring that inventory levels are efficient and cost-effective

Tailored solutions for every scenario – from short-term measures, to medium- and long-term strategies – can be devised to keep stock levels at optimal levels and improve overall financial health.

Optimizing payment terms is about harmonizing agreements on two levels. First, supplier performance reviews create a basis for re-negotiation, to push incumbent suppliers towards best-in-class payment-terms. Second, selective tendering with potential new suppliers, as challengers, also helps organizations to push their payment terms towards industry best-practice levels.

Here, negotiations should follow a holistic approach, including item-price negotiations and payment terms, as well as their interdependencies. That will result in competitive and favorable item and payment terms and conditions. The introduction of supply chain financing – and the holistic management of payment terms – promotes stronger supplier relationships and reduces risk, creating a more balanced and sustainable payment strategy.

Cash management focuses on stopping unwanted cash outflows, via a four-way approach that prioritizes value and time sensitivity.

First, creating a clear credit-supply plan will help guarantee the availability of credit, even in tight financial situations, and so provide liquidity and operational stability. Also, having a budget gatekeeper will help ensure compliance with financial guidelines, prevent unnecessary spending and also help manage budgets effectively.

Next, ensuring expert communication will enable the effective implementation of actions and support team collaboration. Then, finally, real-time reporting and control mechanisms – using proven tools and methodical expertise – will ensure effective and responsive cash management.