Mind the working capital gap!

Capital Advisory

From Ernest Partners

Looking at your working capital during the crisis?

Imagine a business to business wholesale company. After celebrating a good year production and stocks are being built up for a strong spring season. All ready? Boom! Lock Down! Unprecedent in the Corona crisis was the disruption of the supply chain and the temporary closure of businesses.

In this blog I will give our view on the impact of the closure of business on working capital and more important: Give you some directions on how to avoid the classic autumn gap.

Again think about the business to business wholesale company. Stocks were just ready for the spring season, when lock-down was announced. Result: No sales, stock positions remain high. Probably even new stocks were already on their way in the supply chain while other crucial parts were delayed. Luckily the outstanding invoices from pre-lock down deliveries were being paid (often with a certain delay). Available funds were used to pay the outstanding supplier invoices,  but no new client invoices were made… The result: A too high stock position, the available cash running dry due to suppliers and running costs being paid.

Finally reopening business needed additional liquidity due to suppliers being reluctant on delivering again (f.i. credit insurance lines being reduced). In practise this led to the classic pitfall where the old stock is still not sold and is consuming working capital. New deliveries need to be paid in very short timeframe, while new sales have not yet started or just invoiced but not yet paid… In that scenario factoring solves a part of the liquidity need, since you can get your new invoice paid in cash within 24h and use that funding for suppliers and running cost.

Above described effect can be emphasized by an annual seasonal effect, activity being relatively low during summer and demands increasing again in September, leading to a lack of working capital in October (certainly when payment terms of suppliers are getting shorter). The (simplified) visualization clearly shows the gap in working capital (red zone) which cannot be solved with receivables or inventory finance.

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So, how to protect yourselves for this working capital finance gap?

Make sure to have diversified financing option:

  • Long term assets funded long term (equity or long term loans)
  • Mid-term assets and investments funded through leasing or classic straight loans (with different maturities) and
  • Working capital need funded through flexible working capital lines.

Negotiate with your suppliers on stocks and payment terms?

  • Reduce shipments sizes to the stocks you really need, even though this will temporarily increase costs.
  • Check the payment terms you offer to your clients. Reducing them should find you some working capital.
  • Do you own strategic stocks which you have on excess, your supplier probably knows who of his clients lacks of this type of stocks.

You’re already in a factoring program?

  • If you’re already in a factoring program, discuss (temporary) optimization of the program to bridge a period of shortage.
  • More sector specific: f.i. bonus schemes in retail can at the end of the year have a negative impact on receivable finance.

You recognize the above in your line of business? Your cashflow or liquidity statements show a gap and you don’t know how to bridge it? Ernest Partners has strong experience in classical financing issues, alternative funding structures and working capital finance. Contact us at info@ernestpartners.eu for a free (e-)meeting.

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Author : Nicolas Van Klinkenberg

Author : Nicolas Van Klinkenberg

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