Release working capital to unlock business value

Working capital—the cash used to maintain your inventory, order goods and services, and offer your customers competitive payment terms—can be a source of untapped business value.

Tighten up on your payables, receivables, and inventory—the core components of working capital— and you can release cash that immediately boosts the value of your business and can be used to pay off debt, support strategic investments, or return capital to owners.

That capital is vital to growing businesses. A survey conducted by Truist shows that 83% of companies are looking to expand, but only 24% are confident in their ability to access the capital they need.^{Disclosure 1}

Use these four steps to manage your working capital more efficiently and add value to your company:

Step 1: Benchmark your working capital.

Key Performance Indicators (KPIs) quantify financial activities so you can evaluate their success. Zero in on KPIs that hold the key to tightening your working capital so you can put it to better use.

A working capital KPI can be either a simple figure or an equation, like your cash conversion cycle. The lower you can get the number, the less capital you tie up maintaining inventory and operations while awaiting payment.

External benchmarks are important, so make sure you compare your own KPIs to industry standards and similar companies. If others are performing better, look for ways to improve and set your goals accordingly.

You’ll find working capital benchmarks using:

1. Truist Financial Insights – Your relationship manager and Truist team use industry standards to help you better understand your opportunities for improvement and set working capital benchmark targets.
2. Middle market research – Use the National Center for the Middle Market’s online Working Capital Benchmarking Tool to help you establish goals for your business.
3. Industry trade groups, professional associations, and government agencies – These organizations often generate key benchmarking statistics or point to relevant sources of data.
4. Business data – Find detailed industry information online and through subscription services.
5. Professionals who know your business – Turn to trusted business advisors and industry consultants for information on local and industry metrics.

Step 2: Assess the value of improving your working capital.

Evaluate all aspects of your working capital against industry benchmark KPIs, find ways to reach those numbers, and increase the value of your business. Owner value increases when you cut debt, and investors are attracted to businesses with low capital needs and high rates of return.

Step 3: Eliminate your working capital bottlenecks.

Making your working capital more efficient starts by identifying bottlenecks—things like increasing inventory, unpaid customer bills, and missed opportunities to extend supplier payments—then implementing strategies to shrink working capital and keep cash moving through your business.

In a study conducted by Truist, surveyed business leaders indicated they were increasingly concerned about obtaining credit and meeting payables.¹ Releasing cash from working capital bottlenecks can provide instant relief.

Analyze the three main components of your working capital—accounts payable, accounts receivable, and inventory—to find and release cash tied up in bottlenecks:

• Accounts payable – Can you negotiate better payment terms or early payment discounts? Pay electronically for precisely timed payments or pay by card to extend your payables.
• Accounts receivable – Generate invoices at time of sale, consider terms that reduce your days sales outstanding (DSO), and make it easy for customers to pay you. Are you accepting credit cards and encouraging electronic payments?
• Inventory – Instead of building large inventories, consider a “just-in-time” system where items are obtained only when needed. Look closely at your days inventory outstanding (DIO) for ways to reduce it. Encourage staff to keep inventory moving.

Step 4: Create a cash culture to preserve your gains.

You’ll need the help of your entire workforce to identify bottlenecks and improve your working capital KPIs. For example, if you want to stretch accounts payable, make sure that everyone who might initiate an order from a supplier understands the role that terms play.

Take these actions to create a cash culture and increase your capital efficiency:

• Talk about working capital.
• Establish goals and accountability.
• Make working capital management a top priority.
• Empower your staff to take actions that preserve working capital.
• Reward your employees when KPIs hit your targets.

Download a full version of this report, Free up working capital to unlock hidden business value (PDF), for more details.