As businesses approach their year-end on December 31, finance teams across the globe will be reviewing actuals versus forecasts and wondering whether there is anything that can still be done to help improve the business’ working capital position before year end.

Alongside profit and loss, working capital is an important metric in assessing the long-term financial health of a business. Companies with a high level of working capital generally have improved liquidity, greater operational efficiency, and greater profits. It is therefore unsurprising that it is one of the key metrics businesses review as they approach their financial year end and start planning their business strategies and objectives for the following year.

Working capital is managed through four key processes: cash management, inventory management, credit and collections, and accounts payables. Ensuring efficiency and effectiveness of all four of these processes will maximise a business’ long-term cash flow and reduce risks and costs.

However, if a business is looking to make an immediate impact on their working capital position, a review of their credit and collections function provides the best opportunity to deliver quick wins. In credit and collections, the volume of activity tends to directly correlate to the results achieved. Therefore, if you increase the volume of activity, you will in most instances increase the volume of cash collected. A tight deadline will also often provide the necessary impetus to make overdue decisions on ageing ledgers or bad debt which could make significant impact on cash collection. Outlined below are three potential strategies to consider:

1. Increase credit-control coverage

It is quite common, particularly for business which work solely with an inhouse team, to have to make strategic decisions over who they touch with credit-control activity. Limitations to human resources can often mean only 20% of accounts are regularly contacted. And, despite the myths, it very rare for these priority accounts to deliver 80% of revenues – in most cases well over 50% of revenues are not being chased.

If you inhouse team are at capacity, an outsourced credit management agency will have the flexibility and scalability to help you deliver 100% of your customer base with contact. And with activity delivering results, there is no doubt that this will substantially improve your cash collection prior to year-end.

2. Outsource ageing ledgers

Everyone know the statistics, the greater the age of the debt, the harder it is to collect. If your business is sitting on ageing ledgers that your inhouse team haven’t managed to work yet, the likelihood is they aren’t going to in the foreseeable future and the prospects of collecting those revenues are diminishing. If you want to improve you cash position, it is worth considering outsourcing any ageing ledgers to a debt collection agency. Not only will most debt collection agencies work on a contingency basis, so you will only pay when monies are collected, but their commission rates generally increase as the debt ages, so it makes financial sense to not let any ledgers age further.

With a surprising number of blue-chip businesses sitting on millions in ageing ledgers, simply making the decision to get them collected has the potential to make a substantial difference to a business’ working capital position.

3. Do a deal on provisioned debt

How many businesses write of hundreds of thousands in bad debt each year? This is often because it is too small values to warrant servicing or simply lack of available resource. Whatever the reasons there will be few businesses that do not make an annual provision for bad debt. However, even if your business has written it off there are opportunities to generate additional revenues. The first option is to sell it on – this will generate a guaranteed value – although it is highly likely this will be nowhere near its original value at to your business. There are also considerations to had regarding your reputation as a business when debt is sold off. The other option is to pass provisioned debt to third party with instruction to do deals within agreed parameters. This will enable you to realise as much revenue as possible, all of which would be upside from your current position- without impacting your commercial reputation.

These relatively simple to implement strategies can make a real difference to your working capital position within a few months of year end. However, it is without question that businesses who prioritise working capital and have a long-term roadmap of initiatives to drive improvements across all four key processes will ensure the business is in the best possible to weather any downturn and deliver sustained growth.

Author: Mark Smith

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