Working capital will determine business agility post-COVID

This is bad news for Australian businesses, as it translates to an additional $5.5 billion in cash tied up in business working capital cycles. This means companies withhold payments to suppliers in an effort to protect their own cash flow.

2022 will present a new set of challenges. The ABS’s latest jobs figures show a higher-than-expected increase in unemployment in October as the economy shed 46,300 jobs, while delays in international supply chains created a ‘storm perfect” for retailers and manufacturers.

At the same time, COVID is not going away. Little wonder, then, that the Reserve Bank of Australia has warned that Australia’s economic outlook remains uncertain and patchy. Longer working capital cycles will therefore make companies less prepared to face the challenges ahead.

Cash is king for business growth and responsiveness

Jason Ireland, partner at McGrathNicol Advisory, believes Australia’s economic recovery will be led by companies with efficient working capital cycles. A shorter working capital cycle means a business collects cash from customers more quickly and holds an optimal level of inventory, all habits that allow capital to be deployed more quickly to drive growth or weather a crisis. Companies that do this are also more likely to be able to pay their suppliers faster, which has a positive impact on the rest of the economy.

In fact, the 2021 working capital report revealed huge variability in company performance, with the difference between the best and worst performers being greater than 100 days in five of the seven sectors and greater than 200 days in three of these sectors. (agriculture, retail trade). and food and beverages).

Ireland hopes businesses will use the next few months to get into shape, warning that working capital freezes will hold back businesses in 2022.

“Our research shows that a significant competitive advantage can be gained by implementing best practices,” he says.

“Companies that have improved their working capital processes will thrive. The best way to have more cash in your working capital cycle is to collect payments from your customers faster, and this will have a positive impact on your inventory and businesses in your supply chain.

In 2022, there will be opportunities for growth in every industry, but how teams manage their working capital will determine how well they seize that opportunity, says Sean Wiles, partner at McGrathNicol.

“Companies that are ahead of the working capital cycle and manage their cash flow are in the best position to pull the broader economy from the brink,” says Wiles.

Ireland recommends establishing a robust payment collection process. It starts with strong customer engagement to ensure you meet their expectations, a clear contract, and good processes for tracking compliance.

“Best practice processes for invoicing and cash flow management mean there is more cash flowing through a business. This in turn leads to better inventory management and will help other businesses downstream of the supply chain, says Ireland.

The 2021 McGrathNicol Working Capital Report was prepared by McGrathNicol Treasury Advisory & Working Capital Center of Excellence. The Center is focused on increasing cash flow for clients by using McGrathNicol’s cash flow optimization system to forecast, track, save and generate cash.