There’s arguably nothing more important in the world of business than working capital.
It enables you to pay your staff, invest in assets, and keep your supply chain running. High working capital allows you to run operations efficiently, while a low working capital could put you at risk of bankruptcy.
Maintaining a steady supply of sustainable working capital is not easy but also not impossible. It requires you to incorporate environmental, social, and governmental (ESG) criteria into your supply chain practices and build fair relationships with your suppliers and buyers. Using AI-enabled supply chain management software can also help you optimize your inventory and save precious working capital for other essential activities.
In this article, we explore the steps you can take to keep your business running with sustainable and effective working capital.
Sustainable financing along your entire supply chain
A sustainable supply chain isn’t just about having a fleet of low-emission trucks or a group of suppliers who follow ESG criteria. In our highly globalized world, it’s also about creating mutually beneficial financial conditions for all of the suppliers and buyers involved.
What does it mean for financing to be sustainable?
Sustainable supply chain financing refers to the optimal management of working capital in your supply chain so that both buyers and suppliers benefit from trade. It’s achieved when suppliers get paid on time without making losses, and buyers can improve cash flow by managing their stock and suppliers well.
Although sustainable financing is important for both suppliers and buyers, it can have more of an impact on the former, since suppliers often have to deliver raw materials or finished products to their buyers before they receive payment.
Delayed payments from buyers can leave suppliers without working capital to pay for ongoing expenses like payroll and rent, to the point where they may be forced to resort to loans to plug the gaps in their cash flow. Sustainable financing requires buyers to make transactions on time and in full to keep their suppliers in good financial health.
Sustainable financing also emphasizes socially responsible business practices that create environmental, social, and economic benefits for all stakeholders in the global market. The integration of ESG considerations into supply chain operations helps buyers and suppliers avoid financial losses associated with environmental pollution, labor disputes, and corporate corruption.
What are the benefits of sustainable financing?
When your supply chain financing strategy is sustainable, your assets and operations become more resilient to various environmental and economic risks. You’re much likelier to maintain mutually beneficial long-term relationships with your suppliers and customers and adapt to supply chain disruptions caused by climate change.
Sustainable financing helps you focus on the triple bottom line: profits, people, and the planet, without sacrificing one to make gains on the others. While each firm’s sustainable financing strategy may be different, most strategies strive to achieve resource efficiency, zero waste, and customer value.
Pursuing these goals can help you reduce your impact on the planet’s limited resources. It can also help you meet customer demand for sustainably produced goods and environmentally-friendly services – you may even gain the influence to encourage upstream suppliers to invest in sustainable business practices.
Working capital – Tips to move towards greater sustainability
Working capital is vital to the success of any business organization, but it’s also one of the scarcest resources for business managers to obtain. Poor economic growth can cause a drop in sales, hurting your flow of working capital. Additionally, forms of credit such as loans aren’t always easy to access, especially if you’re a smaller firm.
With this in mind, how can working capital be made more sustainable?
What is working capital, and why is it important?
Working capital is essentially the cash that companies use to conduct their day-to-day operations.
Working capital includes receivables such as invoice payments, payables like rent, and inventory. A firm’s ability to meet all of its short-term operating costs and debt obligations determines the state of its cash flow.
All businesses rely on working capital to maintain smooth operations and invest in key assets that can help them build long-term prosperity. If a firm finds itself with low working capital, it could be short of cash to cover short-term debts and expenses, putting it at risk of financial insolvency and potential bankruptcy.
A high working capital, on the other hand, helps to ensure that a company has the adequate cash flow to make profitable investments and meet customer and vendor obligations. Effective working capital management can therefore be crucial to maintaining a healthy balance sheet.
What does sustainable working capital look like in practice?
A firm may seek sustainable working capital by acquiring green working capital loans or implementing a financing structure that focuses on environmental, social, and environmental impacts.
Green working capital loans are usually given by banks to businesses that are working to bring socially responsible products and services to market. Unlike regular loans that are used to buy long-term assets or investments, these loans give firms the ability to cover short-term operational needs such as payroll, rent, and small debt payments. They often require firms to meet specific environmental and sustainability criteria.
Alternatively — or in addition — firms may want to adopt circular financing structures that reduce inefficiencies in the supply chain. They may do so by selecting sustainable raw materials like pine wood that have been harvested and/or reproduced responsibly, allowing them to maintain continuity in their operations. Or, they may recycle finished goods and waste to cut down on production costs.
How does supply chain management technology help you optimize working capital?
You can also work to make your working capital sustainable by managing it with AI-powered supply chain management technology.
This type of inventory management software enables you to gain visibility into your materials inventory and identify loss-generating areas within your supply network. With the help of these tools, you can reduce duplicate spend and optimize inventory across disparate data systems.
More importantly, this software can help you get the right inventory to the right facility at the right time with as little loss as possible. It helps reduce the amount of incorrect inventory in your supply chain, allowing for saved working capital to be utilized for other business purposes, such as ordering discounted supplies in bulk.
5 ways you can increase the sustainability of your working capital
With the benefits of sustainable working capital in mind, the 5 following tips may help you to work towards increased sustainability:
Harmonize your inventory to mitigate risk
A poorly managed inventory can result in missed sales and lost customers if you find yourself in a situation in which you don’t have sufficient stock to immediately fulfill an order.
Conversely, firms with too much inventory may not have enough liquid working capital to pay wages and short-term debts or may be unnecessarily paying to store excess inventory.
By harmonizing your materials master data, you can work towards avoiding either of these situations.
AI-enabled data analytics systems can organize disparate supply chain data across your network and display them on one platform, giving you real-time visibility into orders, inventory levels, and shipments. With better insights, you’ll be better equipped to build balanced stock levels that can respond to changes in customer demand.
Optimize your assets to reduce waste
Inefficient supply chain processes and manual planning techniques can lead to a variety of expensive flaws in your supply chain. From poor asset utilization to constant stock-outs, these inefficiencies can drain precious working capital and cause cash flow problems.
Fortunately, companies can reduce waste by using AI-driven algorithms to optimize their business processes. These solutions can build on the knowledge of your inventory specialists and identify the biggest areas of waste in your supply chain. As AI learns from your data, it can suggest effective inventory allocation strategies that help you reduce waste.
Invest responsibly from sustainable financial sources
One cost-effective improvement you can make is to invest in diverse, sustainable business activities that help you increase your business value. Examples of this might include investments in low-emissions transport vehicles or organically-grown raw materials like cotton that can be harvested continuously.
Though these activities may have high upfront material costs, they require fewer inputs and have lower maintenance and production costs. Sustainable business practices, like the procurement of organic cotton, place a lesser burden on your working capital. Organic techniques, for example, place lower reliance on expensive fertilizers and machinery, which can help to keep farming costs low.
Create incentives for sustainable practice within your supply chain
Your relationships with your suppliers and buyers influence the health of your supply chain. Their commitment to quality products and timely deliveries is one factor that can help to improve the sustainability of your supply chain.
Applying this sustainability commitment across your entire supply chain may not always be easy, but can be achieved by creating green incentives for all stakeholders. One example of this might be to offer long-term contracts to suppliers on the condition that they reduce their fuel emissions and/or source ethical materials.
It may be appropriate to provide other incentives across your chain, depending on your industry and the needs of your suppliers. Creating shared value across your entire supply network can also be a great way to increase the overall resilience of your network.
Invest in natural capital to boost the planet and the economy
At the core of every agile supply chain are the raw materials used to manufacture products. Although renewable, most of these materials can degrade in quality and become completely depleted when they are overexploited. Most resources like timber and livestock depend on intact ecosystems to be replenished.
Firms can safeguard the sustainability of these resources — and protect their working capital — by protecting the ecosystems that supply these resources. Sustainable and ethical sourcing practices can help to create a steady supply of raw materials with as little damage as possible to the environment.
Build a sustainable supply chain with Verusen
Verusen’s cloud-based, AI-driven platform can help you optimize your firm’s critical working capital.
Using the latest data management technology, our software identifies excess material spend and eliminates redundancies in your supply chain, helping you save on cost and time and allowing you to focus your resources elsewhere.
With just 3+ years of materials data, our platform can provide visibility into your inventory across all facilities and harmonize years worth of materials data. We’ve worked with companies all over the world to help them optimize their working capital, saving them tens of millions of dollars in the process.