Increase your liquidity in four simple steps

Philipp Flemming
October 21, 2020
Liquidity Enhancement

Few anticipated the apocalypse that 2020 has so far been, and fewer still prepared for it. As the numbers of cases rise again, we aren’t suggesting building a bunker or panic-buying the pasta aisle again. Instead, we want to talk about liquidity, and how an effective approach to working capital management will help you navigate and emerge strengthened from the crisis. If you want to improve your business’ liquidity and sail smoothly over this second wave, then here are four simple measures to help free up your working capital.

Billion-dollar corona programs have been the saving grace of many businesses this year. The financial relief gave them that leeway to survive the crisis. Six months later, we’re in a similar position; once again, the entire supply chain is being affected and the financial flexibility of many businesses is insecure. If there is one thing we should have learned from the first lockdown, it is that liquidity is the decisive criterion to keep the business running. Regardless of whether difficult economic times means short term issues or world-wide pandemic issues, efficient working capital management is imperative to ensure both financial and entrepreneurial flexibility.

Be vigilant with late payments and overdue invoices

Overdue invoices tie up your money and, a lot of the time, they clear up with just a quick call to the customer.  As simple as this is, it’s still important to do this in a structured and efficient way. That means not forcing the work-experience student to call your most valuable customer and push for payment ten minutes after the bill is due. Instead, classify overdue and almost-due invoices according to factors like invoice amount, aging, and the value of the customer for the company. It’s important to assign these responsibilities upfront and directly. Say, who will be contacting which customers and when? Remember too, that once you have called your customer and there are no unforeseen complaints, there’s no reason not to ask when payment can be expected.  

Get rid of slow and non-moving inventories

If you’ve got stock that is slow-moving or even not-moving, something needs to be done. The first step is to decide whether revenue can actually be generated with the stock. Fire sales, meaning selling stock well-below the normal price, is one option. The other option is relocation - if you have multiple locations, there may be somewhere where that non-mover is a damn-fast-mover. Another typical example that can be tackled instantly is blocked stocks. This means reserving certain stock that could be being consumed elsewhere, which, whilst seeming like a sensible way to avoid customer disappointment, is in fact reducing your liquidity.

A more controversial topic is write-offs. Write-offs may help you equalize the balance sheet, but you should be aware of how the subsequent losses look against the respective costs of holding that stock. Often neglected, these are indirect costs driven mainly by the increasing complexity of inventory management. This is ultimately reflected in your company's profitability.

Optimize your planning parameters

When we talk about planning parameters, we mean how much or how little stock do we plan for and where? What level of demand do we expect, and how can we be sure to have that available? Safety stock, the buffer to deal with variability, is one such measure. However, we often see that companies build up a ‘layer of untouched stock’ above even the safety stocks. This essentially means that instead of sensible safety measures, there is simply a very costly comfort blanket taking up space in a warehouse. Additionally, safety stocks are often set far higher than needed, thus offering great potential for inventory reduction. On the other side, policies for reordering, including the reorder points, need to be examined and redefined as well as minimum order quantities reduced (if possible).  

When dealing with your safety stocks, there are two things to consider:  

  1. Which method is used to calculate the safety stocks, and is this the appropriate method?
  2. Are the service levels, (the way you measure your product’s performance) that you’re using to determine necessary safety stock appropriate for the particularities of the product?

Without a sophisticated and specific approach to your planning parameter decision process, you could be missing vital opportunities to increase liquidity, and at the same time putting the entire supply chain at risk.

Stop paying too early

Companies paying their invoices before due date even though there was no discount agreed is a phenomenon we regularly see when analyzing transactional data. The reasons can be traced back to inefficient processes, insufficient guidelines, and ineffective communication, and should therefore be tackled for the mid- to long-term. If your system does not support automated processing, make sure to train your AP clerks to avoid too early payments. In any instance you need to create visibility on which invoices are open; which are due and when; and which payment terms were agreed. However, even though we don’t always consider discounts as best practice, you should make sure to exploit available discounts.

So what?

These measures are rather simple to implement. However, to really get the best effects it requires industry expertise, data analytics, and effective execution. With AIO Insights, AIO Intelligence and AIO Impact, we have developed SaaS products to create transparency across your supply chain; to simulate the effects of parameter adjustments; and to support effective initiation, execution, and tracking of improvement measures. The advantages of our AIO products, combined with our experience in working capital and supply chain consulting, support these ideas beyond the implementations. Using our aioneers Cash Taskforce, we kick-off the realization of 'real' quick wins from day one. Contact us today and find out how.

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Meet the Writer
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Philipp Flemming
Philipp has more than a decade of experience in optimizing supply chains in various industries with measurable results. He is, therefore, happy to share his experience in our blog.


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