Skip to Main Content

6 Steps to Building a Solid Working Capital Plan

People working on a capital plan

1. Assess future funding requirements for running the business.

Begin by evaluating the company's short-term funding needs (e.g., meeting payroll and paying suppliers, utilities, rent and taxes). The timing of when these payments are due may not correspond to cash inflows from customers, so you must have a strong understanding of cash requirements in order to meet company obligations.

Companies also need to address long-term funding needs. For example, purchasing buildings or plants and upgrading manufacturing facilities requires capital, which is typically financed. Treasury professionals must secure the requisite funding well before the company finalizes plans to execute a large capital project.

2. Calculate the working capital you will need given various growth scenarios.

Conduct a "scenario analysis" to determine if current working capital strategies will support various rates of growth.

First, a business should consider the economy, its industry and marketplace competition to establish a realistic expectation of available growth opportunities. For example, what would happen to your balance sheet if outstanding trade payables grew by 5%? Could you still make payroll?

Next, perform a shock analysis by running the numbers at growth rates well above or below the expected rates in the scenario analysis. This will help with contingency planning.

In addition to revenue growth, assess margins and overhead expenses at various growth levels.

3. Evaluate your current access to working capital and consider diversification.

Companies should review their current access to various funding sources, such as working capital lines of credit, cash and investment accounts, accounts receivable, and inventory. Make sure those sources are adequate to meet your strategic objectives.

As a best practice, middle-market and larger organizations (those with $100 million or more in annual revenue) may want to consider holding cash and investments in at least two separate institutions.

This diversified approach is suggested because in a depressed economy lending tightens up and businesses may lose their access to credit.

4. Review payables and receivables processes, and strive to maximize working capital.

There are several strategies and processes companies can employ to maximize working capital.

On the accounts receivable side, they can offer direct debit through the Automated Clearing House (ACH) network to customers so payments arrive automatically on a predetermined schedule. This approach is useful for companies selling services that call for regularly scheduled payments, such as utilities and real estate firms. Electronic bill payment can help expedite cash flow by providing consumers electronic options to make bill payment through the internet, an agent or interactive voice response while retaining control of when payments are made.

Additionally, lockbox services apply check payments at least one day faster than businesses could if they processed payments on their own. Accepting credit card payments also adds to cash flow predictability while providing a possible revenue benefit to the payer, and remote deposit capture extends cut-off times for receiving same-day credit on check deposits.

On the accounts payable side, companies can use controlled disbursement accounts to learn early each morning which checks they've issued will hit their account that day. They can also use integrated payables solutions or the ACH network to pay suppliers in their preferred method and in a timely manner without worrying about how fast the postal service will deliver a check.

5. As you grow, don't use up cash; use borrowing or credit facilities.

Cash-rich businesses shouldn't automatically tap that cash when it comes time to grow. One reason for this is that a positive cash position will improve a company's access to capital. Additionally, being in a favorable liquidity position reduces the company's cost of capital. So, as the economy improves and investment returns become favorable, it will likely be cheaper for companies to borrow at existing interest rates rather than to dip into corporate cash.

6. Test and update the working capital plan.

Formal working capital plans should be updated annually, supplemented by a quarterly or monthly examination of financial results to see if adjustments are necessary. Consider, for example, whether the company's cash forecast or financial drivers have changed dramatically (i.e., the company has downsized or either merged with or acquired another business). As part of this process, companies should periodically assess the current state of the economy and test their access to lines of credit.

Plan now for tomorrow.

While no one can predict the future, companies must prepare working capital plans now to ensure sufficient access to capital when the economy rebounds.

To get an annual checkup for your working capital plan, contact your Treasury Management Sales Officer or click here to learn more.