Working Capital's New Paradigm

Holistic approach produces more efficient funding

A more streamlined approach to meeting working capital needs is allowing many companies to leverage their assets and secure funds at the lowest possible cost—and only when needed.

We define working capital as current assets minus current liabilities. Working capital solutions are needed when that formula yields a negative number.

When borrowing is required, working capital credit facilities can be tailored to a borrower's needs and circumstances to ensure the most advantageous terms. Companies with tight margins that are initiating a relationship with a new bank generally can anticipate working capital needs collateralized by accounts receivable, product inventory or other tangible assets, along with significant bank oversight. As the banking relationship grows, and with a record of comfortable margins, companies can anticipate increased flexibility in working capital arrangements with reduced or no collateral requirements.

However, a variety of cash flow processes and solutions should be available to minimize borrowing needs. For starters, you want to accelerate receivables with systems that minimize manual processes and risk exposure, while increasing control, visibility and security. With a lockbox, for example, invoice payments are mailed to a bank-controlled post office box at a central location to speed up mail and deposit processing time.

Another example is remote deposit. Image-capture scanning systems allow companies to deposit checks electronically, saving a trip to the bank.

Documentary services combine accelerated receipt of payment with a layer of security to guarantee payment. An example is a letter of credit the purchaser and their bank provide as a guarantee of payment to the seller once documentation has been received that the goods have shipped.

Additionally, you want to ensure funds aren't disbursed sooner than necessary. A robust bank service menu will include a variety of tools to accomplish this goal. Payment card products, for example, enable suppliers to be paid on time but postpone the purchaser's cash layout for 30 to 55 days, and a same-day ACH payment service enables last-minute payment for payroll and/or just-in-time vendor payments.

Take a fresh look at your working capital needs by considering the following:

  • Manpower dedicated to working capital management processes – Except in some complex situations, one or two financial professionals, working in a consultative relationship with the financial institution, should be able to handle these demands.
  • Visibility into your working capital position – You should have access to real-time reporting systems that enable you to ensure funds are made available only when needed, so they otherwise can be applied to the most productive use.
  • Interest expense – Determine whether interest expenses are higher than necessary by obtaining an analysis from a working capital solutions provider.

When you have evaluated these indicators, all that remains is identifying a resource to provide an integrated set of solutions to help you meet your working capital needs and facilitate profitable growth.

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