A company’s working capital is one of the main indicators of its financial health. A business can only grow so much with the amount of cash it has available. This is why many businesses need to keep an eye on their operating capital and manage their working capital. Working capital management simply means keeping track of how much money your company has available at any given time as well as how much you owe your suppliers, partners, or other parties. Working capital management also involves managing the ongoing financial transactions and relationships your business has with its vendors, customers, partners, and suppliers. Keeping tabs on working capital is a challenge for supply chain managers because processes are fragmented and data siloed. Inventory, accounts payable, accounts receivable, and cash management are all managed by separate systems that don’t communicate with one another. This article will introduce you to the basics of working capital management and SCF platforms.
What is Working Capital?
Before delving into the intricacies of working capital management, it is important to clarify what this concept means. Working capital is usually calculated as the difference between current assets and current liabilities. Current assets are anything that can be converted into cash within one year, such as inventory, accounts receivable, and cash on hand. Current liabilities are the obligations that are to be paid within a year, including accounts payable, loans, and other forms of debt. In its simplest form, working capital is the amount of cash available to your business today. But working capital is much more than that. When we talk about working capital management in the supply chain finance, we are referring to a multi-faceted process that includes:
- Inventory management
- The management of inventory levels to reduce costs, improve customer service, increase employee productivity, and reduce the risk of obsolescence and unsold inventory.
- Accounts payable management.
- The management of your company’s debt to suppliers by negotiating better payment terms, implementing supplier scorecards, or selecting more efficient suppliers.
- Accounts receivable management
- The management of customer payment cycles by using factoring, credit loans, or extending financing to customers.
- Cash management
- The management of your company’s liquidity by forecasting cash flow, negotiating terms with banks, or optimizing your working capital structure.
Working Capital Management in the Supply Chain
The working capital management process can be applied to every supply chain stage, but it is most important in the procurement and production stages. Managing your cash flow, inventory levels, and accounts payable is crucial to staying afloat during the procurement and production stages. Inventory is your main source of liquidity, but it can also be a big drain on your working capital if it is not managed properly. If you are buying inventory too early or buying the wrong quantities, you will end up holding a lot of unsold inventory that is not generating cash flow. If you are buying inventory too late, you will not be able to meet your customers’ demands, which can result in reduced sales and a loss of customers. The same goes for your accounts payable.
The keys to effective working capital management
As we have just discussed, there are a few key aspects of effective working capital management. You need to make sure that your processes are centralized, automatized, and integrated. This will allow you to keep track of all your data in one place, which is crucial for effective working capital management. However, there are a few other things you need to keep in mind if you want to optimize your working capital. Here are the three main keys to effective working capital management:
- Visibility – Make sure you have the visibility you need to track your inventory, accounts receivable, and accounts payable. This means having access to all your data in one place and being able to access it at any time.
- Control – Make sure you have full control over your data and processes. This means having the ability to set rules and regulations to make all your systems work together.
- Integration – Make sure all your systems are integrated and that your data is being used to its full potential.
Why is working capital management important?
Working capital is crucial for the success of any business, especially large corporations with complex supply-chain requirements. It allows you to invest in your business, expand your operations, and hire new employees. It also allows you to pay your supplier on time, maintain a good relationship with them, and purchase inventory in the best conditions. It allows you to take advantage of competitive rates if you are financing your inventory and capital assets. Working capital makes it possible for you to take risks and expand your business. It allows you to have a positive cash flow, which gives you the freedom to make decisions. It allows you to avoid cash flow problems, which are very common in the business world. They can lead to insolvency if not dealt with quickly. Working capital management can help you solve financial problems that might occur in the future.
SCF Platforms: A Short Introduction
SCF stands for supply chain functionality. It refers to the functionality of a digital platform to support supply chain processes, including inventory management, procurement planning, demand forecasting, inventory management, order management, and most importantly digitise the financing process for both buyers and suppliers across the trade ecosystem. There are two types of SCF platforms:
– SCF (functional) – provides a set of functionality and an interface to manage supply chain processes. – SCF-LOOK (designer) – provides a set of functionality and an interface to manage supply chain processes. It also allows business users to design their supply chain processes and workflows.
How an SCF platform supports working capital management
- Inventory management – manages your inventory levels and optimizes your inventory purchases. It allows you to forecast demand and sales figures to minimize inventory risk.
- Accounts payable management – allows you to manage your accounts payable by providing suppliers access to early payment and select more efficient suppliers by using a supplier scoring system. It also allows you to negotiate better payment terms.
- Accounts receivable management – allows you to manage your accounts receivable by gaining access to early payment and manage your working capital needs. It also allows you to forecast customer payment cycles to avoid bad debt.
- Cash management – provides detailed reports on your cash flow and allows you to optimize your working capital structure. Some platforms also offer predictive analysis to help businesses anticipate future cash flow needs.
- Inventory optimization – allows you to improve your inventory management by forecasting demand and sales figures. It also allows you to optimize your inventory purchasing by taking into account your available cash.
- Role-based access – allows you to manage the access to your data and system by using a role-based access system that gives you full control over your system.
3 Steps to properly implement Working Capital with an SCF platform
There are three main steps to properly implementing working capital with an SCF platform:
- Define your process to manage working capital – first, you need to define your business process. This will help you select the right SCF platform. Each SCF platform has its own set of functionality that supports the supply chain process. Make sure you select the one that supports the process you need.
- Select the right SCF platform – once you know your business process, you need to select a platform that supports it. There are many SCF platforms on the market, and it can be tricky to select the right one for your business.
- Bring your data together with a data hub or a business data platform – once you have selected an SCF platform, aim to centralise all your data together in one place so that it can be fed into the system. You can do this with a business data platform or a data hub.
Optimizing Working Capital Mangement with Dynamic Discounting
Companies would be wise to look more closely at solutions that might assist optimize working capital given the threat that supply chain disruptions pose to the global economic recovery. Current trade tensions and historically low interest rates have had no impact on market volatility or provided buyers and suppliers with any certainty regarding their access to money. At the same time, banks with lending capacity are being progressively restricted by onerous restrictions that might make it challenging to obtain financing.
In context of this, working capital solutions may help suppliers and customers alike overcome these difficulties. Working capital solutions, such as dynamic discounting, may assist suppliers get the lower-cost financing they need to maintain the health of their businesses in addition to protecting purchasers from market volatility.
Dynamic discounting, in which the buyer provides suppliers early payment at various discount rates, allows businesses to effectively invest their own excess funds in order to earn an alluring rate of return while also lowering the cost of items supplied by getting greater discounts.
Why should you integrate your current ERP platform with an SCF platform for better WCM
Dynamic Discounting and other AI-based features in modern SCF platforms work well when supplied with the proper data, cleaned, and organized. The more extensive and historical the data is, the better these features can perform. Hence, there exists a need to integrate your ERP platform (with all the data) into your SCF platform. What it does is input your existing data to train and organize its own models better.
- Data Extraction & Transformation – This is the process of bringing data from your ERP system and downloading it into a data hub or a business data platform. This data is then fed into the SCF platform for its algorithms to start working. Data transformation is sometimes a better option before your SCF platform can start working. If the data input is too disparate and not suited or clean enough for the SCF platform, then it has to be transformed into a better format, thus using the data in your ERP system for the SCF platform.
Conclusion
Working capital is crucial for any business, especially when large corporations are looking to address their entire value chain including the long-tail of medium to small enterprises. It allows you to invest in your business, expand your operations, and hire new employees. Working capital also allows you to pay your suppliers on time, maintain a good relationship with them. For many businesses, combining SCF with dynamic discounting is the best solution. A business can have enough cash this month but then need to extend out payments to cover liquidity demands the next month. When choosing between SCF and dynamic discounting, interest rate changes may also be taken into account. Buyers may continue paying their suppliers while making the most of their working capital since they have the option to alternate between utilizing their own cash and outside finance.
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