How to optimise cash flow and reduce interest charges
Article by Patricia Holburn.
A business cannot succeed without cash to meet current expenses. Paying bills when they are due is only possible when working capital is well managed.
Working capital is the lifeblood of the organisation
“Working capital is what you use on a daily basis to convert your assets into cash,” says Ovizikhungo Sicwetsha, pan-Africa head of short-term products at Absa Corporate and Investment Banking.
“It is the lifeblood of the organisation, the oil that keeps the business running,” says Bohani Hlungwane, group head of sales, Trade and Working Capital, Absa Transactional Banking.
“The trick is to manage the cash conversion cycle so that you convert assets to cash as quickly as possible and keep cash in the business for as long as possible,” Sicwetsha says.
One of the ways to achieve this is to lengthen the time to pay suppliers. Although this may give the business cash for longer, delaying payment can ruin relationships and reputations.
Working capital finance products that reduce the number of days it takes to turn accounts receivables into cash and extend the number of days to pay are a better option. They also reduce risk because there is more certainty around cashflows, something businesses have struggled with during 2020.
Managing working capital in a crisis
“We are seeing businesses struggling to perfect the operating cycle and be efficient throughout their cash conversion cycle,” Sicwetsha says.
“This is because everyone is looking for efficiencies – debtors are looking to delay payments, creditors want to collect earlier and manage their stock levels as efficiently as possible.”
Sicwetsha says cash conversion cycles differ from sector to sector depending on the state of the economy. “Proper understanding and planning are key to surviving events such as recessions and other economic catastrophes like Covid-19. Building cash reserves, renegotiating supplier contracts and managing inventory much more tightly are just some of the techniques businesses have used to weather this storm.”
Sicwetsha has more advice to help clients manage their working capital efficiently in these difficult times:
Pay creditors when they are due - don’t pay late. Only take advantage of early settlement offers if there is an obvious benefit to you.
Collect trade receivables as early as possible by offering incentives such as early settlement discounts. Use cash in your own account to earn a better yield in money market accounts.
Improve inventory turn and optimise inventory management. Many solutions use data and technology to manage demand and supply, for example, businesses order just what is needed to fulfil a specific order (just in time), or alternatively, carry inventory on consignment.
Communicate and use data. Keep in touch with customers, debtors, creditors and your bank so you know where your business stands in relation to these stakeholders. Use data to identify trends, which debtors respond to early settlements for example, and use these in your working capital management.
Sicwetsha says Absa has solutions linked to each of these working capital elements that will help businesses to improve their cash conversion cycles by getting cash earlier while waiting for the invoice to be settled.
Working capital management solutions from Absa
“We analyse our clients’ working capital to see where we can assist with solutions such as short-term overdrafts, money market overnight loans, trade loans and other short-term financing solutions linked to the entity’s business and their cycles. In some instances, our solutions are looking at the buyer – as means of assisting the sellers get their cash quicker. We also consider funding based on the inventory the client is keeping,” Hlungwane says.
Some of Absa’s solutions are bespoke to the client’s trade cycles and needs, others are designed to manage cashflows and mitigate risks associated with cross border transactions. The group has a number of award-winning solutions for businesses operating across borders and in multiple currencies including customer foreign currency (CFC) overdrafts, cross border trade loans and discounting/refinance of letters of credit.
Absa’s working capital solutions and products can be accessed digitally, and the group is using technology and data to help businesses identify working capital management trends.
“Clients using Absa’s digital platforms can see of who is using lots of cash in their business, who is generating more cash inflows, and when these cash flow movements are happening,” Sicwetsha says. “They can use this information in their forecasting activities and manage their working capital more efficiently.”
This article first appeared on CapeTalk : How to optimise cash flow and reduce interest charges
Source : https://www.pexels.com/photo/silver-and-gold-coins-128867/