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Tips to forecast working capital for mid-market treasury

What you’ll learn


  • Importance of working capital management
  • Tips for forecasting working capital for mid-market treasury
  • Forecasting working capital using cash flow forecasting software

Why is working capital negative in some companies?

The working capital is negative in these cases:

  • Current liabilities exceed the current assets
  • Current ratio (current assets / current liabilities) is less than one
  • Large cash outlay or increase in Accounts Receivables
  • The A/R period is too high, and the A/P period is too low

An example of negative working capital

Consider the following scenario: 

Company A has incurred significant costs in the most recent financial quarter, leaving it with $250,000 in current assets. It has negative working capital of $100,000 due to its current liabilities of $350,000. 

It indicates that the organization would suffer if it had to pay off its short-term debts today. To pay its debts, the company needs to try to push through sales or borrow for the short-term. This depletes the company’s resources for future growth and investment.

How is negative working capital detrimental to a company?

Managing everyday operations can be difficult with negative working capital. It leads to:

  • No working capital- With this, a firm cannot capitalize on seasonal and one-off growth chances. So it misses out on growth opportunities.
  • Supplier overfunding for a lender or investor not considering investing in such a firm.
  • A bad financial reputation that causes all the company’s suppliers to stop releasing credit to it.

Having negative working capital suggests companies should immediately seek short term financing. Working capital management helps companies prevent negative working capital.

What is working capital management?

Working capital management ensures a company’s operations run smoothly. It tracks assets and liabilities.

Working capital management is critical to the cash conversion cycle (CCC). It helps businesses make the most use of their current assets and generate enough cash to meet short-term commitments.  As a result, companies can:

  • Reduce their reliance on external borrowing
  • Grow their operations
  • Fund mergers and acquisitions
  • Conduct research and development

The formula for calculating working capital

Working capital = Current assets – Current liabilities

Changes in working capital impact a company’s cash flow.

What effects do working capital changes have on cash flow?

Here are a few scenarios to help understand the impact of changes in working capital on cash flow:

  1. If a transaction raises current assets and current liabilities by the same amount, there will be no change in working capital. But, cash flow will improve.
  2. For example: Assume a business got a sum of money as a short-term loan. In this instance, the cash flow statement would also increase. Working capital would alter if current assets grew and current liabilities grew by the same amount as a payable.

  3. If the number of transactions decreases, a current asset has no impact on current liability. But, there could be a change in working capital and cash flow.
  4. For example: If a company purchases a fixed asset with cash, cash flow will drop. Since there must be an outflow of cash, there are no increases in current liabilities (imagine a fixed asset acquired with a long-term loan). That will ultimately reduce working capital and cash flow.

  5. If a transaction improves current assets but has no effect on current liabilities, working capital will increase. And, cash flow will also increase.
  6. For example: If a company sells a fixed asset for cash, it signifies an inflow of cash or an increase in account receivables. That too also without affecting the current liabilities. In this situation, increasing working capital boosts cash flow.

  7. Working capital is unaffected if a transaction raises accounts payable and current assets by the same amount. But, a reduction in cash flow occurs. 
  8. For example: If a company buys inventory with cash, it indicates there must be an increase in inventory with the upfront cash payment. Cash gets reduced while stock gets increased in this situation. As a result, working capital remains the same. However, cash flow will decrease.

Mid-markets are more prone to changes in working capital. And it sometimes leads to a negative cash flow. They can avoid these by following some best practices in capital cash forecasting

Tips for forecasting working capital for mid-market

Tips for working capital forecasting

  1. Increase visibility and forecasting accuracy
  2. Companies can better manage their working capital with high visibility into cash flows. With increased cash visibility, they can do the following:

    • Meet short-term financial needs
    • Pay debts
    • Develop the business
    • Support planned capital investment

    Many companies fail to identify their existing cash balances. This necessitates the maintenance of a sizable cash buffer to cover unforeseen expenses. Businesses can seek ways to increase visibility. Using a working capital forecasting software connects with various treasury systems. It also helps in increasing visibility.

  3. Enhance overall receivables management to maximize working capital
  4. Enhancing overall receivable management is critical to prevent running out of cash and funds. This preserves liquidity and eliminates risks. Bad debts are a vital issue for mid-market companies. 

    It is thus vital to have adequate control and administration of receivables. It aids in making sensible investment selections for debtors. 

    By effectively managing accounts receivables, mid-market companies can:

    • Keep their cash inflow steady
    • Reduce losses caused as a result of bad debts
    • Control the security and reliability of accounts receivable data
    • Use captive finance aid to centralize accounts receivable functions

  5. Employ real-time data analytics to detect anomalies
  6. When corporate leaders have access to relevant information, they make financially sound judgments. 

    The days of month-end and year-end reporting are long gone. Nowadays, every business leader needs instant access to reports and KPIs. It gives the financial visibility required to adopt and maintain a working capital plan. 

    Real-time data visualization through dashboards aids in identifying:

    • Patterns and trends
    • Discrepancies and potential risks
    • Excess cash

  7. Leverage an automated cash flow forecasting system
  8. Real-time information is critical. That also ensures that decision-makers have the knowledge to safeguard/strengthen liquidity. Unfortunately, many firms fail to achieve the clarity necessary for insights. Since gaining access to their data is a time-consuming and manual process. 

    Using an automated cash flow forecasting system improves the forecasting of working capital. Access to working capital on time provides a company with many possibilities like:

    • Supporting strategic projects
    • Tracking cash inflows and outflows with ease
    • Preventing overborrowing
    • Minimizing the time-consuming manual data transfer from one resource to another
    • Making confident decisions on investment/debt
    • Using idle cash

Automating data collection can save more than 90% of the time. So, forecasting working capital allows the treasury to focus on liquidity management. 

How is forecasting working capital profitable for a business?

Using cash flow forecasting software for the working capital forecasting helps:

  • Increase liquidity by maintaining a high level of working capital regularly
  • By establishing a consistently high level of working capital, businesses can ensure that enough cash is available for:

    • Future incoming opportunities
    • Unforeseen circumstances

    It also gives businesses more control over how they run their operations. This allows them to fulfill more swiftly:

    • Future incoming opportunities 
    • Customer requests 
    • Invest in new goods
  • Enhance profitability with efficiently operating areas like A/P and A/R
  • Only when areas such as A/P and A/R are running smoothly can a company reach a high level of working capital. AI-enabled cash forecasting solution improves A/R and A/P forecasts by:

    • Performing historical analysis and regression analysis to identify the historical trends.
    • Predicting customer-specific payment dates by supporting many customer and invoice-level variables.
    • Using suitable models and algorithms for A/R, A/P, and other cash flows.

    This helps the treasurer:

    • Review the A/R data and tweak forecast models for better forecast accuracy.
    • Centralize A/P processing and reporting across the company. 
  • Improve financial performance
  • A business can improve the liquidity by:

    • Increasing the rate of return on capital
    • Reducing Days Payable Outstanding (DPO)
    • Maximizing savings with early pay discounts
    • Freeing locked cash flow in intercompany payments with netting

    Customer success story with HighRadius cash forecasting system

    A $765 million global company faced these challenges:

    • Unable to track 63 legal entities because these entities did not report accurately.
    • Forecasted for four months out: Weekly for the first two months and then the next two months.
    • No categorization of data.
    • Conducted A/R forecasts in random order based on guesswork, which created a lot of variances.
    • Had a lot of intercompany payments, and working capital management was poor.

    By using the HighRadius cash flow forecasting system, it achieved the following results:

    • Improved A/R forecast accuracy by 90%.
    • Improved forecasting frequency.
    • Increased granular visibility (with invoice-level drill-down).

Schedule a demo with our experts and learn how to consistently check and calculate working capital.

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The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.