Cash is King – The importance of working capital optimization for 2024

This decade-old saying could not be more relevant in 2024: Cash is King.

Free cash flow and measures to improve working capital stands out as a top priority for CFOs due to its profound influence on a company’s financial resilience, competitive edge, and capacity to generate sustainable value for stakeholders. This emphasis is particularly crucial amidst the ever-evolving and unpredictable landscape of modern business.

Inefficient working capital management can:

1. Limit a company’s flexibility to take advantage of opportunities, including M&A, or weather financial downturns. Lack of available cash may prevent investments in growth initiatives or hinder the ability to respond to unexpected expenses.

2. Lead to higher interest expenses and borrowing costs, reducing profitability.

3. Delay payments to suppliers, which can lead to supply chain disruptions.

4. Face the risk of insolvency or bankruptcy, especially during economic downturns or periods of financial stress.

Overall, working capital optimization is crucial for maintaining financial health, ensuring operational efficiency, and supporting long-term sustainability and growth for businesses. Yet, optimizing working capital is not always as easy as it may sound and require cross-departmental collaboration to optimize working capital end-to-end. Companies need to be resilient to face risks and always look for driving efficiencies.

1. Having a reliable basis to track and forecast cash flow that allows continuous improvements. Advanced forecasting tools leverage machine learning algorithms and artificial intelligence techniques to analyze large datasets, identify patterns, and make predictions with greater accuracy. These tools can adapt to changing conditions.
2. Drive a cash flow-driven company culture which makes it a key priority to constantly improve cash flow and Identify cost-saving opportunities across all areas of the business, such as renegotiating contracts with vendors, optimizing energy usage, and eliminating unnecessary expenses. Lowering operating costs conserves cash and improves profitability.
3. Drive end-to-end working capital process improvements: This starts with eInvoicing, automating payment runs in ERP and also includes highly automated collections and dispute management processes. Having the right cloud solutions in place that can optimize working capital end-to-end is imperative in 2024, given its pivotal role in enhancing operational efficiency, reducing errors, and accelerating cash flow cycles. This strategic move is essential to stay competitive and agile in an era characterized by rapid technological advancements and evolving customer expectations.
4. Use Working Capital Financing as a strategic lever to improve working capital metrics and create higher resilience in uncertain times. Modern Financing platforms allow you to not only improve working capital targets but also provide flexibility to adjust between different strategies in an agile way to cater for changes in the economic environment without the need of long implementation and roll-out timelines. Moreover, they help to create financial resiliency along the value chain and thus provide benefits to suppliers as well as customers to make it a win-win-win.

Change is the only constant

While the last years will go into the history books with high inflation rates and recessionary signs in many regions, there are indications that global economies have seen the worst of inflation, and interest rates are expected to stabilise, leading to a fragile but optimistic view of economic growth. The outlook certainly remains uncertain and it is clear: modern working capital processes need to allow for agility and the ability to manage the needs very closely.

While cash and working capital is king, there are certainly additional priorities for CFOs in 2024. SAP has just released the e-book CFO Perspectives: Unlocking Insights Through Conversation – 2024 Challenges and Perspectives.

I recommend downloading it and getting valuable insights from top SAP and SAP Taulia professionals.

Curious to know more? My colleagues and I are sharing insights on:

• What are the top priorities for CFOs in 2024?
• Why should companies create an effective working capital strategy in 2024?
• How are ESG and working capital management connected? Why do CFOs need to outline strategies involving ESG and working capital management in 2024? What are the benefits of this unified strategy?

I love to hear from you what your 2024 priorities are. Let’s get ready for 2024 and beyond! Download the e-book here: