Sievo: Optimising working capital, doing more with less

What is working capital, and how can procurement benefit from optimising their use of it?

Used day-to-day by any operational organisation around the world, working capital incorporates trade receivables, inventory, cash and bank balance, and trade payables. To optimise these combined elements organisations must strive to balance assets, liabilities, and effective management of cash flow.  

“Financial managers are constantly being asked to do more with less. It is important to track every payment: to know exactly what you owe, to whom, and when each payment is due. Analysis of this information provides insights into opportunities for freeing up cash and aiding the budgeting process,” said Erkki Paunonen, Marketing Specialist, Sievo.

So what are the benefits of working capital optimisation? 

“One of an organisation’s main obligations is to pay suppliers’ invoices on time, but there is more to it than that. In order to optimise working capital, an organisation must also consider new incoming receivables, the appropriate level of inventory, and the cash balance,” further explained Paunonen.

By effectively managing these components, businesses can ensure profitability and a smooth-running business. For times where additional working capital needs to be found while waiting for customer payments, this effective management can also help organisations weather cashflow challenges. 

The key benefits of working capital optimisation include:

  • Freeing up cash from the balance sheet 
  • Fine-tuned processes allow organisations to move inventory faster and renegotiate more frequently, which can directly impact profit margins
  • Greater market flexibility and shorter lead times
  • Less reliance on external funding

“Ideally, once these core operational processes are streamlined, management can focus on more strategic initiatives [...] Working capital optimisation can keep the core operations of the business in check while increasing money at hand to pursue new opportunities in [the] market,” commented Paunonen.

“There are multiple ways to optimise your cash flow. To start, the organisation must define a working capital strategy,” added Paunonen.

Taking payment terms as an example, these are typically agreed with suppliers or specified to them. These terms affect cash flow, profitability, sales growth, credit, and supply risk.

“The functions which will have the most effect on payment terms are Accounts Payable and Procurement. Together these functions must process and negotiate all trade receivables and trade payables, money owed, and money earned. Therefore, optimising payment terms is the most direct way to increase working capital,” said Paunonen.

What is causing inefficiencies in payment terms?

  • Relying too heavily on manual processes
  • Failing to issue purchase orders for each new order
  • Not confirming if order deliveries match contractual terms
  • Losing access to early payment discounts 
  • Incorrectly loading supplier and/or contact information into master data files
  • Lacking processes and systems to prevent late payments

To find out more about working capital optimisation, click here.

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