Working Capital And Supply Chain Finance, The Perfect Partnership
Working capital defines a business’s financial health and, to a certain extent, its overall growth trajectory in the future. In simple words, it is the difference between what the company possesses and what it needs to pay. The pandemic has brought about an uncalled for stretch to the working capital raising liquidity issues for several businesses. Optimising working capital has reached the top priority list of today’s companies, which was triggered by the supply chain disruption from the current economic instability.
When it comes to analysing a company’s working capital, the simplest way is to take a look at its assets versus liabilities. The assets could be cash, accounts receivable, inventories of raw materials and finished goods ready to be shipped. At the same time, the liabilities could be accounts payable, loans, scrapped inventories or any other short-term or long-term debts.
Why Does Efficiency Matter?
Right from managing short-term expenses, inventory, payments, taxation, and daily operations, everything requires substantial working capital. Since a company runs on a day-to-day basis, the absence of liquidity could result in untimely payments, rocky supplier relations, increased attrition rates, and overall instability. Working capital specifics can have different meanings depending on the industry and any particular business. Sometimes, a negative working capital could just mean a short-term bad debt, while other times, it could also signify approaching insolvency.
A thorough analysis of balance sheets and carving out a customised path for your liability management could go a long way. Working capital needs vary from company to company, but the bottom line remains that with efficient working capital management comes a greater future of the business.
Can Working Capital Go Haywire?
Let’s try and put it to thought in the current scenario. Consider the manufacturing industry. When a company’s current liabilities exceed the existing assets, working capital travels to the negative side, making it a critical period for any company.
The manufacturing industry is anyway subject to working capital challenges as the supplier and production expenses are incurred much before the goods are ready to be sold to customers. Enter Covid-19!
In the current situation, where delayed payments and reduced sales have become a norm, the manufacturing industry is facing a major blow. Cash-flow problems, procurement delays, payment troubles, the issues are plenty. Even the slightest increase in raw materials prices would cause a further dip to the already challenged working capital, potentially crashing the entire ecosystem.
Alternatives for the Manufacturing Industry
Taking on loans or a line of credit from traditional banks might look like the end of troubles, but it is also the beginning of more debts and liabilities. Plus, with a few credit line services discontinued by many lending institutions, extensive research would be needed to find the most effective solution.
Another option is that the industry could change the way it functions. Switching to lean manufacturing, reducing the number and value of the final goods, is one way forward. But wouldn’t that be the last option for any manufacturer, considering the company structure and the resources relying on them?
Working Capital Management With Supply Chain Finance: The Game Changer.
Supply Chain Finance helps the entire ecosystem by using the latest technologies. It bridges the payment terms gap between the buyer and supplier, thus dissolving the working capital strain.
Going back to the manufacturing industry, Supply Chain Solutions like KredX’s Invoice Discounting and B2B Buy Now Pay Later helps the manufacturer clear their pending supplier bills faster and extend payment terms for better working capital management. The suppliers, in turn, receive timely payments that enable them to provide better and quicker services. Using this model can enhance the working capital of all industry entities, and that “about-to-crash ecosystem” can get back to safety, functioning in top gear!