8 min read
4 Jan 2021
8 min read
4 Jan 2021
The way that companies approach working capital management has changed considerably during the Covid-19 crisis. When the crisis began, companies took rapid action to ensure they had enough access to liquidity. For many, this meant drawing down on existing credit facilities. But recent months have also brought a major focus on freeing up liquidity sources and tapping into working capital.
For suppliers, this has resulted in significant challenges. Many large companies delayed payments to their suppliers – whether as a way of extending their Days Payable Outstanding (DPO) or due to disruption during the switch to remote working. As a result, 43% of respondents to Taulia’s Covid-19 Supplier Survey reported an increase in receiving late payments. As the report noted, “the main reason seems to be that businesses are conserving their own cash amidst the economic uncertainty.”
In this challenging environment, suppliers are increasingly taking advantage of early payment opportunities. In April, Taulia reported that early payment volumes had surged by 208% month-over month, while new supplier adoption increased by 178% – a clear sign that small businesses were looking beyond traditional bank lending to overcome their cash flow gaps and increase their working capital.
So what will working capital management look like in a post-Covid world – and how can businesses address their own working capital needs without adversely affecting their suppliers?
Reviewing working capital
As the crisis continues, companies will be looking closely at their key metrics of Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO) and Days Payable Outstanding (DPO). By reducing DIO or DSO, or by increasing DPO, companies can reduce their cash conversion cycle and thereby maximize their access to working capital:
Alongside these three metrics, companies are likely to ramp up their efforts to adopt accurate cash forecasting in the post-crisis world. Forecasting future cash flows was already challenging before the crisis began – and with customer behavior changing considerably during the pandemic, this has become even more difficult.
Companies can overcome the challenges by taking advantage of an effective real-time cash flow forecasting solution that combines live data, historical data and predictive models. With an accurate forecast in place, companies will be better positioned to highlight any upcoming cash gaps, manage their excess cash effectively and make better-informed decisions.
The Covid-19 crisis has led to major working capital challenges for businesses in many different industries. From managing inventory levels to collecting payments from customers, every component of working capital management has been affected by the disruption brought by stay-at-home orders, supply chain disruptions and economic uncertainty.
But the crisis has also highlighted the role that early payment solutions like supply chain finance can play in supporting both buyers and suppliers during turbulent times. It should come as no surprise that early payment volumes increased significantly as the crisis began. As companies navigate the uncertainties ahead, early payments will be a key tool for companies seeking to optimize working capital – not only for themselves, but also for their suppliers.
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