Can working capital strategies go too far?

Many organizations are paying increased attention to working capital strategies. But pursuing any strategy without having a clear eye on the results can lead to problems, and working capital is no different.

Working to increase cash reserves makes sense in many scenarios. It’s a way to guard against economic uncertainty or prepare for a major growth spurt. But many organizations fail to see the danger inherent in pursuing the “money is king” mantra to the ends of the earth.

Hyper-concentration on working capital often leads to tunnel vision. In search of liquidity, organizations fail to recognize the long-term damage they can cause to their operations and strategic partnerships with key vendors.

Lack of growth and innovation

“You have to spend money to make money.” Having an excessively large cash reserve means that you are not using that money to invest in research and development, in finding new products and services to build, or in growing your business.

Simply put, cash in hand that does nothing is inefficient. Any working capital strategy should be tied to specific goals – having a goal for that money, because working capital strategies are only a means to an end, not an end in itself.

Organizational stagnation

The problem goes beyond simply missing out on these opportunities. A push to collect cash while abandoning growth could lead to a long-term shift in mindset among the leaders of the organization. Policymakers can avoid riskier measures that go against “king’s money,” despite the fact that higher cash reserves help support bold operational pivots that could benefit the business.

This is a foolish and senseless mentality, and dangerous for any organization that lives or dies on the basis of innovation. There will always be a hungry and promising competitor who outsmart a bigger player who isn’t taking risks or looking for the next step the market takes.

Damaged supplier relationships

A common working capital strategy is to shorten payment terms with customers while delaying payments to suppliers. The difference creates a positive cash flow that looks good on a company’s books.

This is a strategy with clear winners (organizations delaying payment) and clear losers (customers rushed to pay earlier and vendors who may not see payment for 60 days, 90 days). , see more). What is worse? The suppliers with the least negotiating leverage, the smaller companies with the less working capital, are the ones who are often forced into payment terms that could cripple them. Many small businesses can only cover three to six months of running costs under the best conditions. Net-90 payment terms could seriously complicate, if not bankrupt, small businesses in a bad economy.

Moving forward

How do we solve work tunnel vision? We remain true to the original vision that our working capital programs were meant to support. Don’t look for liquidity without having a use case for that liquidity. Don’t put supplier relationships at risk for short-term improvement in a balance sheet.

Understand where your organization is heading and develop a working capital strategy that will help you get there.

About Donnie R. Losey

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