Preface: Prevention of backsliding in already optimized working capital levels, and developing deeper and more conservative convictions on managing working capital to encourage the life of a more successful financial business environment, are truly inherent skills associated with decades-long successful entrepreneurship.
Working Capital Tools for Successful Business Performance (Segment IV)
Credit: Donald J. Sauder, CPA, CVA
Working capital management has two non-financial centric benefits. 1) To prevent backsliding in already optimized working capital levels, and 2) Developing deeper and more conservative convictions on managing working capital to encourage the life of a more successful financial business environment.
The discredit of the merits of working capital management is often par for business, until a shortage results in acute financial pains. In these scenarios, an awareness of the appropriate steps to take to manage and alleviate that financial pain, work to restore the financial vibrancy of the business. While those steps are not the subject of this article, at those time, few financial advisors measure working capital as a key financial metric. While that is not necessarily a mistake entirely, from an accounting standpoint, meticulous financial management and assessment of historic data, e.g. working capital measurement, will highlight changes, and bold concerns with organizational communication and cohesiveness, customer service, and marketplace conditions (i.e. customer inventory purchasing characteristics.) These are common quantifiable concerns that lead and precede extensive working capital atrophy.
Abrupt changes in working capital management such as extending payment terms on vendors from 15 to 30 says to improve the cash conversion cycle, can result in increased prices on purchases, and changes in vendor terms. Reducing inventory levels can lead to forfeited sales revenue, and customer atrophy. With appropriate data, chief financial officers can support these technical parameters to manage onboard assets, and unboard ancillary cash requirements.
It is of note to ensure that the data gathered is not a burdensome or intensive effort. The data collection is usually facilitated with IT systems that intuitively analyze and identify key parameters of both financial and non-financial data to provide informative data maps on customer activities. There is no business without sales. Data driven sales metrics lead to a greater appreciation of what drives customer revenues that are either recurring or discretionary.
Too often a lack of appropriate attention and guiding convictions towards the value of working capital management oversight, results in navigational challenges when financial turbulence occurs. Entrepreneurs cannot appreciate that in formative years they’ve run the entire business from an intuitive sense. Then when (the entrepreneur) begins to develop the business beyond what they comfortably can manage individually, they eventually face pressure because they do not have proven processes in place for monitoring delegated tasks, nor a process to track key performance data. As key persons revolve, the unattended monitoring of processes from a data standpoint, that can result in atrophy of working capital, eventually leading to financial turbulence.
Importantly, when a business is experiencing atrophy in working capital levels, if the business has not identified and quantified the root causes of backsliding performance, often the safest approach is to immediately scale back business activity as opportunity permits, to a more manageable level. Following re-stabilization, then develop processes of data management both financial and nonfinancial to effectively manage operations, and resulting working capital adjustments. Secondly, oftentimes businesses in turbulence need bolstered with working capital. Minimal risks on the additional credit is imperatively prudent.
Businesses that are solidly established from a working capital perspective, often have developed valuable convictions, and disciplined themselves to invest the time and have devoted proactive attention to prevent backsliding and atrophy of working capital levels, accomplished with timely measurement and reflections on historic, current and future data, and communication of likewise performance metrics. The big-ticket items on management include – inventory, customer deposits, and accounts receivables and payables.
Research at Harvard Business School by Lynda Applegate, Janet Kraus, and Timothy Butler takes a unique approach to understanding behaviors and skills associated with successful entrepreneurs. “The entrepreneurial leaders we know are constantly searching for tools that can help them become more self-aware so they can be more effective,” Kraus explains. “This tool is going to be uniquely useful in that it was specifically developed to help entrepreneurs gain a deeper understanding of the skills and behaviors that they need to be successful.”
Prevention of backsliding in already optimized working capital levels, and developing deeper convictions on managing working capital [conservatively] towards building a more successful business, are truly inherent skills associated with successful decades-long entrepreneurship.