Using Working Capital to Maximize Margins

Working capital is the balance left after you subtract your liabilities from you’re your assets. Where the former comprises of your wages, expenses and any debts owed, and the latter any cash, properties and revenue due.

As such, it both describes and determines how healthy your organization is. Because it’s your working capital that funds your current set of projects, and makes possible any planned expansion of your pipeline of projects.

Supply chain knock-on effects

One of the consequences of the pandemic, and of the supply chain disruption that then followed, has been that many organizations find themselves with depleted working capital (or ‘net-working capital’ as it’s sometimes referred to. But they’re exactly the same thing, and as working capital is necessarily net.).

Materials and fixed assets need deposits, and often have to be paid for up front. But a clogged up global supply chain, and all the delays that result, mean late deliveries of individual projects and products. So your invoices go out late and your payments are delayed, and you’ll probably end up having to pay penalties and fines.

Working capital determines your margins

With less working capital, you’ll be less able to properly service your current portfolio of projects, and be hampered in any planning you might want to do around any future projects or portfolio expansion.

What’s more, some projects will be so delayed that their completion will only be possible in time for next year’s set of accounts. Which will have serious repercussions for your revenue recognition and for how your organization is viewed by the markets.

Managing working capital depends on data

So it’s vital that you’re able to efficiently manage your working capital because your margins depend on you being able to invoice for billable work promptly. And that’s only possible if you have an accurate picture of how much you owe, and how much you’re owed. With the emphasis very much on the word ‘accurate’.

Because, as John McGrath says in the video below:

“If working capital is not measured correctly, it threatens the viability of projects, and impacts on the implementation of strategy.”

Your software makes you the ‘control tower’

The right software package will allow you to gather and collect all your data in the one place, and to streamline the processes used by each of your different business units. So everyone is kept up to date in real time, and everything is immediately visible.

Effectively, your software makes you the ‘control tower’, ensuring that everyone is working from the same facts and figures, and is kept permanently up to speed.

All your timesheets, budgets and workflows will be coordinated and integrated into the one system. And changes to any of them will be immediately applied to all documents and data sets across the entire organization. So your invoices will be handled much more efficiently, both those that need to be sent out and those that need to be paid. Which will mean quicker client approvals and faster payments.

And your internal structures will be configured so that whoever needs to will be automatically alerted when something happens, when a milestone is met or not met, as your parts, material and machinery move through the different stages across your supply chain.

Making your data work for you

In other words, as it so often does, it all comes down to accurate data and how you use it. As they write in this McKinsey report1,

“Since the efficient management of net working capital requires granular and detailed measures, adopting a data-driven, bottom-up perspective is critical.”

The granular view into each project that the right software gives you will help you to manage your working capital much more effectively. You’ll be able to analyze historical data, and factor in the insights you glean from them into your forecasts and predictions. And to then produce measurable KPIs that you can track and monitor.

All of which is made possible thanks to the control you enjoy over all the data that’s streaming in and out of your organization.

Efficient management of your working capital will help with both liquidity and with managing your inventory. Which will lead to operational efficiencies and, therefore, to bigger profits. All of which comes back to how well you manage your working capital. And what that relies on is using the right software.

Source

1A data-driven approach to improving net working capital, McKinsey and Company, February 9, 2021

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