How CFOs should optimise working capital to manoeuvre through economic volatility

In an economic context marked by sustained inflation, rising costs for businesses, and increased caution from financial institutions, effective cash and financing management becomes paramount to ensuring stability and growth for businesses. 

Faced with these challenges, CFOs play a crucial role in implementing strategies to optimise working capital requirement (WCR) and exploring various options for external financing. 

In this article, we delve into strategies to optimise working capital, before exploring the possibilities of external financing.

This article is written in collaboration with Defacto, which provides flexible short-term financing to SMEs in France, Germany, Spain, Belgium, and the Netherlands

Seasonal and economic challenges

The current economy is characterized by several significant trends that impact businesses and their financing strategies.

High inflation rates have directly impacted operational costs for businesses. Prices of raw materials, energy, and other essential inputs have increased, adding further pressure on companies' profit margins. This rise in operational costs has direct repercussions on profitability, forcing businesses to seek solutions to maintain competitiveness, while preserving their profit margins.

In parallel with high inflation, businesses are facing increasing difficulty in obtaining bank financing. Interest rates have risen, making the cost of credit higher for borrowers. Additionally, banks are adopting a more cautious approach to lending, resulting in stricter credit criteria and increased reluctance to grant loans, especially to businesses considered to pose higher risks.

Current market trends show a decrease in the number of fundraising rounds, and thus a decline in multiples. Companies are facing challenges in attracting investors and obtaining external financing, limiting their options to finance their growth and activities. This evolution of the financial market requires an adaptation of companies' financing strategies, which must explore alternative solutions to meet their working capital needs.

In this complex economic context, businesses are facing unprecedented challenges in financing. It is essential for CFOs to understand these trends and adopt flexible and innovative strategies to ensure the stability and growth of their companies.

Optimizing working capital requirement

Efficient working capital management is a crucial aspect of companies’ financial strategy, allowing them to release liquidity and improve their overall financial health.

Because working capital draws from and impacts several cash flow streams, you need control over each of the following:

Accounts receivable management

Effective management of accounts receivable is essential to optimize WCR. The introduction of advances and improvement in the collection of unpaid invoices are effective measures to reduce payment delays and accelerate cash inflows. 

You may need to actively involve (and incentivise) sales forces in the collection process to strengthen the relationship between employees and promote faster settlement of receivables.

Supplier management

Effective supplier management involves renegotiating payment terms and prioritizing payments based on their impact on the company's operations. 

Review supplier management tools regularly to ensure optimal cash flow management and maintain strong relationships with business partners.

Inventory management

Inventory management is also crucial in optimising WCR. Limiting supplies by adjusting order thresholds reduces capital immobilisation and improves inventory turnover. 

Similarly, try to optimise the level of “safety stocks” (backups) to then minimise storage costs. Of course, you still need sufficient product in stock to meet demand.

New financing methods

New financing methods may let your business diversify sources of funding and optimize your capital structure. 

One example is lease-back, which involves selling assets in exchange for financing. This offers an efficient solution to release liquidity while preserving assets necessary for business operations.

Employee awareness of cash flow challenges

Raising employee awareness of cash flow challenges is essential to create a corporate culture focused on responsible financial management. Involve all staff in the search for efficiency and process optimisation. 

This helps you maximise your ability to generate and retain liquidity, thereby contributing to the overall financial health of the organization.

Ultimately, it’s the CFO’s role to monitor key WCR management indicators (DSO, DPO, inventory turnover rate), and ensure the reliability of cash flow forecasts. But you have a whole team there to help!

Accounts receivable financing

The use of factoring, especially for SaaS solutions, is an effective option to transform customer receivables into immediate liquidity. Factoring lets you receive payment now for as-yet unpaid receivables. 

Inventory / supplier financing

Similar to factoring, companies may also consider obtaining financing against inventory. This gives you a short-term loan with which to buy goods (inventory), with the inventory itself used as collateral. 

Utilizing external financing

On top of managing your existing working capital well, there may come a time when a cash injection from the outside is the best path forward. External financing gives companies additional opportunities to meet their liquidity needs and supports growth. Which is particularly valuable in a dynamic and demanding economic environment.

Here are some of the options available:

RTC tax benefits

Did you know that you can pre-finance Research Tax Credits (RTC)? Lots of innovative companies (and especially startups) qualify for RTCs, but most wait until tax season to receive them. 

You can anticipate your RTC reimbursement and benefit from an immediate cash flow. This helps you finance those very research and development activities and support your own innovation.

Modern lending platforms 

Small businesses in particular may benefit from short-term financing. Loans from modern providers like Defacto can provide working capital coverage for a variety of cash flow challenges, from deferred accounts payable to stock inventory to marketing needs to payroll coverage.

These modern platforms typically differentiate themselves from traditional lenders by being more flexible, better tailored to growing companies, and much faster to onboard with. But there is still a place for classic banks, too. 

Banking solutions

Companies can also resort to traditional banking solutions for products like loans or the issuance of treasury bills. These options give additional financial flexibility and can be used to address short-term cash needs or finance one-time investments.

And while banks can feel a bit old fashioned at times, you might feel more confident and secure knowing they have decades of experience and sound financial backing.

Fundraising

Although the fundraising market is experiencing a downturn, there is still some activity for seed rounds. However, funds remain more cautious about post-seed rounds (Series A, Series B, Series C).

Still, even a down round may bring you solid funding tailored to your growth ambitions. Additional fundraising can enhance your ability to thrive in a dynamic and demanding economic environment. Even if VCs aren’t dishing out cash as they did in recent years.

Conclusion

In a changing economic environment, effective cash management and a financing strategy are essential to ensure the sustainability of companies. Arguably, nothing is more important to company survival than working capital. And it won’t manage itself.

Chief Financial Officers must adopt flexible and innovative strategies to optimise working capital and explore new sources of financing. 

By raising awareness among employees, monitoring key indicators, and exploring external options, CFOs help ensure the financial resilience of their companies, particularly while the economic environment offers so many obstacles.

About the Author

Benjamin Bitton is 2CFinance’s Managing Partner. With 15 years’ experience in financial advising, and having assisted over 1,000 clients, 2CFinance supports entrepreneurs and investors in the French startup ecosystem. Entrepreneur? Our part-time CFOs will assist you in managing your company with a methodology tailored to each stage of maturity. Investor? Our Transaction Services team will support you in your strategic operations by conducting financial due diligence.

Defacto offers real-time, flexible short-term financing to SMEs in France, Germany, Spain, Belgium, and the Netherlands. With their automated scoring system, they can assess eligibility in 27 seconds. They can then provide instant cash-in of receivables or deferred payment of payables. In 24 months of operation, they have financed over 400 million euros to more than 7,000 SMEs.