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Working capital solution for companies facing cash shortfalls

What you’ll learn


  • Understand why companies face cash shortfalls.
  • Learn the tips to improve working capital.

What is working capital and working capital management?

Working capital is the money available to meet current and short-term obligations. It is necessary to ensure that a business has the cash to meet its daily needs.

Working capital improves with effective working capital management.
Working capital management ensures that a company has enough liquidity by monitoring:

  • Accounts Receivable
  • Accounts Payable
  • Stock
  • Debt

The goals of working capital management include:

  • Maintaining working capital operating cycle
  • Reducing the cost of capital spent on the working capital
  • Increasing the return on current asset investments.

How do we analyze the working capital of a company?

The current or working capital ratio measures a company’s capacity to meet short-term obligations. Working capital is calculated by using the formula:

Working capital = current assets – current liabilities

  • Cash, receivables, and inventories are examples of current assets.
  • Payables, taxes, wages, and interest are all examples of current liabilities.

Businesses use key performance ratios to identify areas that need attention, such as:

  • Working capital ratio
  • Inventory turnover ratio
  • Collection ratio

These help to preserve liquidity and profitability.

Example of working capital calculation:

Assume XYZ Company has $20,00,000 in current assets and $25,00,000 in current liabilities. The Gross Working Capital will be $20,00,000 in this situation. The Company’s NWC would be (-$5,00,000) because its current liabilities exceed its current assets. The company would experience a liquidity crisis due to its negative working capital. This impedes business operations in the long run.

Credit Rating Agencies view a high negative working capital as a negative sign. When the situation does not improve in the future, they reduce the rating by one notch.

What are common problems in working capital?

The following are the common issues in working capital:

  • Lack of cash visibility across different departments and regions
  • Difficulty in recovering receivables from cash-strapped customers on a timely basis
  • Greater levels of bad debt write-offs
  • Lack of real-time data to assess the efficiency of the working capital plan.
  • Lack of capacity to handle different scenarios
  • inability to identify the location and amount of excess cash leading to high cash buffers and reduced returns

These problems can lead to poor working capital, which can cause cash shortages.

Why do cash deficit companies have working capital issues?

These are the reasons why companies suffer from low working capital:

  • Inaccurate cash flow forecasting:
  • Inaccurate forecasting leads to the maintenance of large cash buffers. This results in lower business investment or higher borrowing costs. Inaccurate cash forecasts can also negatively impact the forecast team’s internal credibility.

  • Manual operations:
  • Many businesses run their day-to-day operations manually, such as:

    • Gathering data from different sources
    • Collaborating between departments
    • Using spreadsheets to consolidate data

    These tasks are time-consuming and error-prone and lead to low cash flow visibility.

  • Lack of systems to track receivables:
  • Firms don’t have suitable systems to analyze customer payment patterns. Hence, they are unable to track and manage their receivables. This leads to a high DSO and impacts a firm’s reputation.

  • Reports are dead-on-arrival:
  • Manual methods result in ‘dead-on-arrival’ reports. This results in high turnaround time and low bandwidth. This obstructs timely decision-making and prevents teams from focusing on high-value tasks.

How can a company improve working capital?

Here are some ways to improve working capital:

  • Improve cash visibility: Companies with operations in different parts of the world have several banks and ERP systems. This results in limited granular visibility into cash flows. Automated cash forecasting creates a single source of truth by gathering data from TMS, ERPs, banks, and FP&A systems. This leads to improved visibility into business cash flows.
  • Improve forecasting accuracy: Incorporating AI on top of customer specific variables helps in improving forecast accuracy. This helps treasury teams in shifting from manual tasks to strategic duties like:
    • Team and task management
    • Reporting
    • Decision-making
  • Improve A/R management: Accounts receivable forecasting is difficult for a various reasons:
    • Different customer payment patterns
    • Business cycles
    • Seasonal trends
    • Credit score
    • Discounts and disputes
  • AI improves A/R cash forecasting accuracy in the following ways:
    • Automates data capturing from different sources
    • Provides access to A/R cash flows at a granular level
    • Accurately forecasts payment dates
    • Maps historical and current data to identify trends
    • Adds variables that determine customer behavior
    • Uses the best-fit algorithms to crunch variables
  • Run scenario analysis: Cash flow forecasting software helps treasury track scenarios by:
    • Allowing manual override (spreadsheet-like functionality) to stress-test many situations.
    • Forecasting changes in the value of a portfolio due to various occurrences. Treasury solutions identify the degree of impact on cash flows caused by distinct scenarios. This helps the treasury team come up with solutions to potential financial problems.
  • Perform variance analysis: Most companies neglect variance analysis due to bandwidth limitations. So, their forecasts are usually inaccurate. Hence, they should perform frequent variance analysis. Here are some benefits of accurate and regular variance analysis:
    • Understand deviations between forecast from the actuals
    • Identify the variance drivers
    • Make adjustments to the forecasts
    • Revise forecasts frequently
    • Improve forecast accuracy
  • Cut unnecessary expenses: Cash deficit companies should try to cut costs to overcome their negative cash flow. They can do so by:
    • Cutting production costs
    • Reducing supply expenses
    • Reducing inventory level
    • Using cloud storage services
    • Automating time-consuming tasks
    • Tracking tax write-offs
    • Avoiding interest fees
  • Shorten operating cycles: Shorter operating cycles suggest that a company has enough cash to maintain operations. It also means that companies can recover investments and meet their obligations. If a company’s operating cycle is very long, it can cause cash flow issues.
    There are three ways for a company to lower its operating cycle:

    • Speed up the sale of its inventory
    • Reduce the time needed to collect receivables
    • Extend the time to disburse payables
  • Track balance in the revolver: Revolving credit is good for companies that have unanticipated expenses. Cash-deficit businesses can overdraw from their credit facility based on the revolver balance. The following methods help to keep track of the balance:
    • Keep track of the quantity of credit on a frequent basis.
    • Use a debt module to track when money is taken from the revolver.
    • Make short-term forecasts to know how much money will be borrowed from the revolver. This reduces the risk of overborrowing.

How can HighRadius cash forecasting solution help manage working capital?

Here are some key features of HighRadius cash forecasting solution:

  • Uses historical forecast vs. actual data to ensure that current forecasts are more accurate
  • Analyzes regional, corporate, and currency variances to improve accuracy
  • Improves visibility and reduces errors by integrating with many ERP systems, bank portals, and TMS
  • Provides real-time data that enables accurate reporting and decision-making
  • Increases accuracy in cash forecasts
  • Runs scenarios and records the outcomes to compare best and worst cases

The following are the benefits of the HighRadius cash forecasting solution:

  • Make confident working capital decisions with accurate cash forecasts.
  • Reduce borrowing costs and increase investment returns by taking proactive measures.
  • Forecast for all cash flow categories, including A/R and A/P with 95 % accuracy.

Customer Success Story with HighRadius Cash Forecasting Cloud

A company with a revenue of $765M was facing these roadblocks:

  • Due to inaccurate reporting, they could not supervise their 63 legal companies.
  • Forecasted for four months: weekly for the first two months, then at a high level for the next two months.
  • Data was not categorized. The A/R forecast was done in a random order based on conjecture, resulting in many deviations.
  • There were many intercompany payments and weak working capital management.

They acquired the following benefits after using the HighRadius solution:

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

Is your company facing issues with cash flows and finding it difficult to manage working capital? Schedule a demo to learn how your company can enhance its 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.