In the latest of his “Future Trends in Project Management” series Project Management advisor and lecturer, John McGrath outlines the importance of working capital and the impact that it can have on an organization.
Is there a difference between cash flow and working capital?
The terms cash flow and working capital are used interchangeably, which causes significant confusion in many project organizations. Cash flow is the inward and outward movement of cash; essentially the management of income and expenditure. However, working capital is measured by comparing a firm’s current assets against current liabilities. It is essentially the money available to meet your current short-term obligations.
It funds the project pipeline, business as usual, innovation, and expansion plans.
The importance of measuring working capital
If working capital is not measured correctly, it threatens the viability of projects and impacts on the implementation of strategy.
I don’t think that the previous assumption of the availability of adequate working capital can be taken for granted, and in some projects, the availability of working capital should feature on the risk register.
We need to be more cognizant that one of the often-overlooked consequences of the pandemic and associated supply chain disruptions is the knock-on impact on working capital.
Delays in the supply chain delay work. They delay project progress and as a result of that, invoicing gets delayed, but unfortunately there is typically no delay in the upfront deposits or payments required for materials.
Streamline the working capital cycle
It is imperative that project organizations assess and streamline their working capital cycle.
For project work, regardless of the industry, a key area of focus has to be now the efficient approval of billable project work. Followed by timely invoicing and payment, which is essentially the backbone of adequate working capital.
Enterprise PPM solutions can accelerate the working capital lifecycle with digital timesheets, workflows, streamlining client approval of work and timely invoicing, and the receival of payments.
Avoid unpredictable payment cycles
It is also worth considering that payment cycles in project-based organizations are very often unpredictable. Delayed milestones often lead to delayed payments, which impacts on adequate working capital.
A useful alternative to sporadic and infrequent invoicing based on delivering milestones is to agree on a regular payment plan between the client and supplier or contractor. A regular monthly payment plan can benefit both parties, as regular payments are more predictable and easier managed.
Efficient working capital supports all aspects of strategy implementation, innovation and continuous improvement within an organization. In fact, working capital is often a measure of the organization’s management team.
Reduced working capital impacts on projects programmes, strategic planning and strategic realisation. A high level of working capital, however, is a strong indicator of a focused and well managed company which can proactively drive change support, continuous improvement and foster innovation.
And I will conclude by recapping that a simple but highly effective way to address the risks associated with a lack of working capital is to simply agree a regular payment schedule. It reduces the gap between the project work and the payment of that work.
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Our solution streamlines your working capital management, which will significantly improve your margins.