Working capital options for daily business operations

Managing working capital is essential for funding a company's day-to-day operations and ensuring financial stability. Working capital represents the cash and other short-term assets available after accounting for liabilities (i.e., current assets minus current liabilities). Effective management of working capital is critical for achieving long-term, sustainable success, as it ensures that a business is utilising its resources optimally.

Working capital management is hugely important to ensure that a company has sufficient cash and cash equivalents to meet short-term obligations whilst also ensuring that there isn’t too much capital tied up in short-term assets, thus restricting capital available to the business to exploit opportunities as they arise or to fund longer-term growth.

Good working capital management means balancing sufficient liquidity to meet short-term obligations with minimising the amount tied up in short-term assets, thereby freeing capital to seize new opportunities and support long-term growth. There are various funding options available for working capital needs, ranging from everyday overdraft facilities to committed revolving credit facilities, supply chain finance, and asset-backed facilities (such as invoice discounting).

Overdraft
The traditional overdraft is probably the most flexible working capital solution, generally uncommitted in nature, meaning there is typically no charge unless it is utilised. As such, they are very useful facilities to fund working capital requirements whilst also acting as a standby facility to cover unexpected payments or any delays in payment receipts.

Committed revolvers
For companies with substantial “core” working capital needs, committed revolving credit lines provide certainty of funding essential for day-to-day operations. These facilities charge interest on drawn amounts and a commitment fee on undrawn amounts, offering stability in exchange for this additional cost.

Asset-backed facilities
This option has grown in popularity in Ireland, allowing businesses to leverage working capital assets (like inventory and receivables) to improve liquidity. The most common type of asset-backed lending in the Irish market would be invoice discounting (providing debtors are suitable). However, some companies also use stock financing or a combination of both, depending on their asset profile.

Seasonal facilities
For businesses with seasonal or cyclical working capital needs, tailored facilities such as seasonal overdrafts or lines that adjust with business cycles can be beneficial. It’s essential that any financial covenants align with these fluctuating requirements.

The cost of working capital facilities generally reflects the risk associated with the borrower and the specific facility. For instance, if a borrower is seeking an invoice discounting facility and has a strong debtor book (for example, blue-chip clients), it may help achieve slightly more attractive pricing due to the lower perceived risk for lenders.

To optimise working capital management, businesses must fully understand their needs and choose the most suitable and efficient funding options. By structuring an appropriate mix of committed and uncommitted facilities, companies can accommodate unforeseen working capital challenges while allowing flexibility that aligns with the business’s needs.

Common working capital challenges
Several issues can disrupt the payment cycle, such as:

• Delays in large debtor payments due to missed cut-offs, IT issues, or the debtor’s own funding problems.
• Slower sales reducing stock turnover, leading to delayed cash receipts.
• Creditors tightening or imposing new credit terms, negatively impacting working capital requirements.

Strategies to address working capital shortfalls

1. Ensure adequate facility structure: Maintain a well-structured suite of facilities with enough headroom to cover unexpected increases in working capital needs.
2. Extend creditor terms: Where possible, negotiate extended terms with creditors to maximise the gap between cash inflows and outflows.
3. Reduce debtor days: Renegotiate terms with debtors to secure quicker payments, potentially offering incentives for early payment.
4. Optimise inventory management: Proactively manage inventory to avoid excessive capital being tied up in stock, ensuring a leaner and more efficient working capital cycle.

Effective working capital management is crucial for businesses, regardless of whether they operate in capital-intensive sectors. The Forvis Mazars corporate finance team collaborates closely with clients to analyse their unique needs, whether they are dealing with outdated facilities, facilities that no longer meet their requirements, or the absence of any facilities, which can lead to significant cash flow challenges. By structuring a tailored mix of committed and uncommitted facilities, we assist clients in not only funding their daily operations but also improving profitability and cash flow, reducing funding costs, and freeing up capital for long-term growth investments. 

This article featured in The Irish Times special report on Corporate Finance. 
Author Paul Rickard is a Director in our Corporate Finance team with over 12 years’ experience working in the Corporate Finance and Corporate Banking sectors.