“Cash is King” is a colloquial phrase often heard in business circles regarding the importance of holding sufficient cash for short-term working capital and maintaining an adequate level of liquidity.
The 2024 Working Capital Report by McGrathNicol (released November 2024) revealed a $754 million increase in cash tied up in working capital across ASX-listed companies. This was driven by extended debtor and inventory cycles, and an average Days Working Capital (DWC) increase by 0.4 days.” The impact of which is felt throughout the entire supply chain as a “knock-on effect” to SME business, creating a working capital squeeze.
Why Working Capital Matters
For SMEs, particularly those in Western Australia’s resource sectors, this trend underscores the importance of proactive cash flow management and implementing best practice working capital management techniques.
“Working capital performance is a primary indicator of an organisation’s health, providing insight into how management teams operate and the strength of their relationships with customers, suppliers and other key stakeholders. The capacity to turn sales into cash faster reduces the cost of running a business and provides a material competitive advantage.”
Key findings explained by Partners Jason Ireland and Sean Wiles, McGrathNicol, November 2024
Key Challenges in Working Capital Management
Managing cash flow effectively is critical for SMEs, especially in mining and construction. The 2024 report highlights several challenges:
Debtor Cycles
The report highlights that Days Working Capital (DWC) rose to 43.5 days in FY24. Companies, especially miners and tier-one suppliers, are holding onto cash longer.
Creditors & Expenses
On the flip side, managing creditor obligations remains crucial. Suppliers of parts, tyres, and other essentials need timely payment to maintain healthy supplier relationships.
Holiday Period Impacts
During the holiday season, businesses frequently experience a slowdown in cash flow due to delayed payments. This can strain their cash reserves, as revenue collection tends to drop, making managing operational expenses and obligations more difficult.
Practical Strategies for Cash Flow Management
Here’s what it means for your business and how you can stay ahead with some practical strategies to manage your cash flow over the holiday period and in general:
Strengthen Debtor Management
- Ensure timely and accurate invoicing.
- Regularly follow up on outstanding invoices.
- Keep communication open with debtors to encourage prompt payments.
Monitor Creditor Obligations
- Balance your cash flow needs with timely payments to suppliers.
- Avoid overextending credit terms to preserve and strengthen relationships with suppliers.
Focus on Inventory Management
- Focus on effective inventory management strategies, especially considering the ongoing fluctuations in commodity prices and other influencing factors.
- Integrate sales, operations and inventory planning.
- Refocus on supplier management, if required, to ensure the security of supply.
Plan Ahead
- Forecast your cash flow needs for the holiday period and reserve additional working capital to cover any payment delays.
- Implement comprehensive and effective cash forecasting practices to enable better financial planning and decision-making.
Global Events and Opportunities Ahead
The easing of supply chain disruptions post-COVID and stabilised inventory access is offering relief for businesses. This shift allows companies to operate more efficiently and better respond to market demands. However, global factors warrant careful monitoring as they could significantly impact economic stability and business operations.
For example, the impact from the recent U.S. election introduces a layer of uncertainty that could lead to shifts in policy and regulations. Additionally, commodity price fluctuations—especially in key sectors like lithium, coal, and gold—remain watchpoints.
As markets evolve, businesses need to remain vigilant and adaptable to navigate these opportunities and potential obstacles effectively.
Prepare Your Business for a Successful 2025
Whether you’re navigating seasonal cash flow challenges or seeking to optimise your working capital cycle, having the right financial strategy is key.
At Ledge Finance, we specialise in working with SMEs to explore tailored debt products and cash flow management techniques.
Get in contact with our team to discuss how we can help you maintain financial stability and prepare for a successful 2025 with tailored working capital solutions.
Learn More
Why is cash flow so important for businesses?
What is Working Capital? And How Can Working Capital Finance Benefit Your Business?
Operating cash flow: The core of your business
Please note that the information provided here is general and does not constitute financial, tax, or other professional advice. You should consider whether the information is appropriate for your needs and seek professional advice before making any decisions.
