Working capital – june 2021
Jun 17 2021
Working Capital is one of the strongest indicators of the health of a business. The proper management of working capital will ensure that a business can maximise its cashflow as well as provide accurate forecasting to management. Working capital management will largely be concerned with Accounts Receivable (debtors), Accounts Payable (creditors) and Inventory.
The proper management of working capital is directly correlated to the overall viability of your business and your capacity to grow. Sound working capital management is more than the ability to keep sufficient cash on hand to pay creditors, it is about maximising cashflow and ensuring that the investments made in those assets are working efficiently and to their full capacity.
Although each business is different, there is much to be learned from a proper analysis of these numbers including:
- Benchmarking working capital values against industry peers.
- Ratio analysis in order to understand the correlation between working capital values and other business drivers, such as sales.
- Understanding the movement of asset and liability values throughout the business cycle and in comparison to previous periods.
- Using this analysis to drive more accurate cashflow forecasts.
Who Are PCI?
PCI are a firm of chartered accountants who are principally concerned with business health. When undertaking a review of the management of working capital in any business we will have a particular focus on Accounts Receivable.
Our analysis will include:-
- A review of credit policies to ensure that the amount of credit being offered to particular customers is within acceptable risk parameters.
- A detailed analysis of collection efficiencies having regard to ratio analysis and industry comparison.
- Consideration of collection procedures and management of slow payers.
- A review of standard terms and conditions to ensure that recovery opportunities.
- Review of high-risk customers and other risk management issues including the use of trade indemnity insurance.
- Policies and procedures relating to bad or doubtful debts.
In addition, our analysis will also be concerned with the management of Accounts Payable, including the ability to meet creditor payment terms, the opportunity to take discounts where offered, and the potential opportunity to extend agreed payment terms.
Thirdly, we will give consideration to Inventory management having regard to the relationship with sales and an analysis of particular fast/slow-moving stock items, and we will also review the processes for dealing with obsolete stock in order to ensure accurate reporting.
Who will benefit?
PCI is a firm of chartered accountants who are principally concerned with business health. When undertaking a review of the management of working capital in any business we will have a particular focus on Accounts Receivable.
Directors - Whether you are an independent, non-executive Director, or you are hands on in the business, you will benefit from a third party analysis of working capital management which will provide you with :- a) A report card on working capital management including strategies for improvements which are likely to lead to increased cashflow. b) A risk analysis on what is likely to be your largest asset (Account Receivable).
Chief Financial Officers - As a CFO you may be reliant on staff to advise you on specific matters relating to the management of debtors or creditors. A deep dive into those issues with specific ratio analysis and industry comparisons will provide :-
a) Greater confidence in the proper management of those areas.
b) Tools for better ongoing management and reporting.
c) Strategies for improving cashflow.
Financiers – The provision of an independent third party review of working capital, and in particular accounts receivable values and processes will provide financiers with:-
a) Confidence in the accuracy of the underlying numbers.
b) A better understanding of the business drivers and the relationship between various asset categories.
c) Potentially more accurate reporting and cashflow forecasting.
How to proceed
If you are working with a business that could benefit from a Working Capital Report from PCI Partners there are 3 simple steps involved in order to receive a fixed price quote.
- Provide us with a sample set of monthly management accounts.
- Complete a short 1-page checklist as to the matters you would like addressed.
- Let us know whether you would like the review conducted with our without engaging with the existing accounting team.
We will come straight back to you with a fixed price quote and estimated timing for completion.
For a free, no-obligation discussion, please feel free to contact Stephen Michell | Philip Newman | David Quin