The Extreme Importance of Working Capital: Finding Working Capital To Drive Sustainable Growth
When it comes to financial performance, we often focus on the bottom line and making a profit, but there’s another number to watch that could mean not only the difference between staying afloat and sinking fast, but will also show you where cash isn’t being utilised efficiently in your business.
Looking to raise debt or equity finance? Stop right there. First check your working capital, and, in particular your net operating working capital – you’ll be surprised how much cash you actual have.
So, what is working capital, and in particular, what is Net Operating Working Capital?
Defining Working Capital
Working capital is a measure of the money available for a company to run their day-to-day operations. Specifically, Net Operating Working Capital (NOWC) is calculated by taking the current assets required in operations and subtracting non interest-bearing liabilities – it’s one of the foremost indicators in accessing a company’s liquidity in the short term.
When you calculate a company’s net operating working capital you are taking steps to better understand the company and what it is capable of on a financial day-to-day basis. You can even figure out if the operating capital is right for your business growth and what to do to unlock tied up cash”
And, when you also look at a business’s cash conversion cycle, you can uncover significant financial intel which helps management build a better, less financially draining business.
Defining Cash Conversion Cycle
The cash conversion cycle gauges the effectiveness of a company’s management and, consequently, the overall health of that company. It measures how fast a company can convert cash on hand into inventory and accounts payable, through sales and accounts receivable, and then back into cash.
If you take control of your cash conversion cycle, you’re removing the negative impact from late paying customers, and poor credit terms with suppliers. No wonder businesses are seeing extended and or late payments from their customers. These customers are savvy and understand paying later has a positive impact on their cash conversion cycle and know it reduces pressure on net operating working capital.
Here’s an example we take businesses through – Amazon.com and Dell;
Amazon.com and Dell have been able to produce goods on demand, reducing their own inventory conversion period to close to zero.
Since buyer payments are made by credit card, the receivables collection period is also close to zero.
In addition, if they pay suppliers after a 20-day payables deferral period, they can end up with a NEGATIVE cash conversion cycle.
In that case, the faster the firms grow, the more cash they generate.
The impact of changing your cash conversion cycle couldn’t be more prevalent in this example.
It’s a regular occurrence that when we help businesses take control of their cash conversion cycle, the amount of working capital required reduces dramatically.
For example, one business with annual sales of $10m saw a reduction in their Net Operating Working Capital of around $1.3m, in effect, free cash flow (cash unlocked from working capital) was obtained simply by using smart financial solutions to reduce their cash conversion cycle. Our off-balance sheet supply chain finance product is one in particular that affords on-time payments to suppliers, but lets the business pay Fifo Capital later.
Our charter at Fifo Capital is to try and solve immediate short-term cash flow and focus on innovation in financial solutions which gives the business management team the control over accounts payable, inventory and accounts payable and in doing so, businesses start to see phenomenal changes.
Free cash flow represents the cash a business can generate, the more cash you unlock from your business, the more efficient you are and the less dependency on debt or equity finance you become.
The problem is traditional finance, debt-driven, or invasive to a businesses relationship with customers or suppliers. The innovation and disruption Wayne and his team have brought to Australian businesses positions their clients as lean, financial efficient, profitable businesses with ability to support their growth in local and international markets.
WAYNE MORRIS, Chief Executive Officer, Fifo Capital Australia
An accounting and corporate finance specialist labelled a ‘game changer’ by his peers at Grant Thornton, London where he held a senior position in Government Advisory for corporate finance.
His drive to disrupt traditional financing for businesses led Wayne to lead the UK for a major European Fintech, rewriting how invoice finance and supply chain finance works to deliver financial solutions to businesses throughout all tiers of supply chains.
Wayne is often consulted or has advised on supply chain finance or has provided these solutions to many leading brands and their suppliers, including: Apple, Airbus, Carillion, EDF Energy, Lego, Lotus, McLaren, Porsche, and Wartzilla.
Wayne understands how technology can be used to deliver robust finance solutions for business clients, which also satisfies internal risk controls and measures, such that its easy for businesses to access the finance they need.