2020 was a year of disruption. The outbreak of the coronavirus and the unprecedented measures needed to curb its spread took the world by storm and left industries in shambles. Amidst unparalleled supply chain disruptions as countries closed borders, businesses were forced to cease operations and go remote at a moment’s notice. The need to manage liquidity and optimise working capital became crucial to build resilience and help businesses survive this storm.
As markets open up and businesses overcome and recover from the crisis last year, some lessons on managing liquidity and working capital can be carried forward and used in the years to come.
Here are a few takeaways on managing liquidity amidst supply chain disruptions:
1. On-time vendor payments
Counterintuitive as this might sound, paying vendors and suppliers on time no matter the circumstances are critical to maintain steady relations and strengthen associations with supply chain partners. While a myopic short-term move that is apparent is larger companies arm-twist smaller vendors to extend credit periods and widen the working capital cushion, this is not a sustainable approach. Pushing vendors to the backs of the wall might get a business a few concessions, but the trust is lost as the vendor will move out as soon as they have better customers who treat them right.
Companies that make the payment on time tend to develop better relationships with their vendors and are better positioned to negotiate lucrative deals, payment terms, and discounts in the long run. No organisation can run smoothly without the support of its supply chain partners, and in times of disruption, these partners come to a business’s rescue. To manage liquidity and working capital optimally, make sure to treat suppliers right and honour payable obligations to the extent possible.
Additional Read: Rethinking working capital strategies for FY21-22
2. Optimum inventory levels
Excessive stock levels can place a considerable burden on the cash flow of any organisation, whereas insufficient stocks can result in a loss in sales and dampen customer relations. The key is to find the right balance in inventory levels at all stages – raw materials, work-in-progress stocks, and finished goods.
The challenge for every organisation is to establish a balanced stock level to avoid the increasing costs for physical storage, insurance, and wastage if it is a perishable item. This can be done better by employing predictive algorithms that offer accurate forecasting of the stock levels at all times.
The second biggest impact in the last year is the inability to manage fluctuations in stock levels due to widespread supply chain disruptions. Raw material availability interrupted business operations and thereby impacted sales of several manufacturing companies across industries. Diversifying vendor base and ensuring a solid supplier connect closer to the place of manufacturing is a must to prevent future manufacturing bottlenecks. Additionally, centralised acquisition with automated monitoring of reorder levels can ensure optimum inventory levels and smooth working capital management.
Additional Read: Working capital management in a post-Covid world
3. Review receivable processes
The third significant variable affecting working capital management is optimising receivables. Shorter receivable periods with efficient credit policies and collections systems in place enhance working capital management.
One crucial area of working capital is to send out the invoices as fast as possible. Organisations should reassess invoicing process to remove any inefficiencies in the entire process, including manual processing challenges, lost invoices, and inability to handle a high number of invoices. Companies must consider investing in the right Accounts Receivable (AR) technology to deliver invoices electronically to quicken the billing and collection cycle and ultimately reduce the cash conversion cycle. Accurate invoicing, automated reminders and thorough collection processes ensure a shorter receivables cycle and improved cash flow.
Reassessing the debtor’s contracts and credit terms may be necessary for some organisations. The organisations should review the terms of payment and agreements to ensure that the line of credit offered is not getting stretched to maintain the necessary cash flows.
Supply chain disruptions directly impact working capital and liquidity regardless of the size of the organisation or its maturity. Businesses need to learn their lessons from the COVID-19 crisis to build resilience and ensure the survival and steady growth of the enterprise in the coming years. Get in touch with Tata Capital to know more about how you can better manage working capital and liquidity with our diverse range of offerings tailored to meet unique business requirements.