In times of economic recession, the liquidity position of organizations is under high pressure. Growing inventories, later-paying customers and suppliers who are tighter on payment terms. This all has a negative impact on your working capital. Your liquidity position is vital to the vitality and continuity of your organization. Working capital optimization is therefore important when inventories increase, customers pay later and suppliers tighten their payment terms. In many cases, the government takes measures during an economic recession, such as deferring payment of taxes or concessions in labor costs. But what else can you do yourself to optimize your working capital? We provide our five tips below.
1. Take advantage of accounts receivable financing
You can obtain liquidity faster by having your customers pay invoices in advance. This way, you can pay your suppliers or make investments. Moreover, this strengthens the relationship with your suppliers. Not all of your customers will be able to pay in advance and may ask for an extension. In this case, it is wise to invoice in parts and check your customer’s creditworthiness. This way, you can work out appropriate payment terms together.
2. Ensure adequate credit management
It is important to be consistent and adequate in your credit management. You can best do this by setting up and adhering to fixed procedures, such as a fixed time for sending reminders.
3. Optimize your invoicing process
A well-designed invoicing process ensures that your liquidity position improves. This way, you avoid having suppliers already paid and products delivered, but still waiting on debtors. In addition, make sure that you send invoices as soon as possible after an order has been placed.
4. Optimize your inventory
Inventories cost money and are therefore considered waste from a Lean perspective. Therefore, align sales and purchasing so that you keep the right stock for sales. To do this, calculate the turnover rate (= number of products sold/(products in stock + products sold) and inventory in weeks (= total inventory/average weekly sales) to determine your inventory strategy. This way you won’t be stuck with large inventories and selling no to your customers.
5. Make liquidity forecast a standing agenda item
Make the liquidity forecast a recurring agenda item of management meetings. In this way, you can make timely adjustments or initiate improvement actions. It is very useful to have an up-to-date dashboard with the most important figures at all times. Determine in advance on which KPIs you want to steer and use storytelling in your dashboard.
You can download the five tips on 1A4 below.
