Negotiation's Impact on Working Capital Management
While most businesses pay attention to increasing revenue and improving margins, one way to accurately assess a company’s financial health is through its working capital. Even Cassio Casil, Managing Director of Corporate Client International Banking for J.P. Morgan Commercial Banking, states that even though this figure will not usually appear on an income statement, the working capital can still amount to significant revenue for a company.
However, having good working capital also means that one needs to have the appropriate interpersonal skills to achieve such a feat. This is where negotiation and building good business relationships can play a part in efficiently managing a company’s cash flow—something that is explained later on in this article.
The importance of efficiently managing working capital
Simply put, the working capital is a figure that represents the available operating liquidity of a company. It is calculated by the current assets minus the liabilities and hints to the cash available for the business’ daily trading operations. From this definition alone, one can see that working capital is a determining factor of a business’ operational success or downfall.
Deutsche Bank explained that working capital management is how companies handle hidden liquidity reserves. This encompasses inventory management, debt management, accounts payable recollection, and assessing the payments due and a company’s accounts receivable.
Keeping a close eye on this financial metric gives companies the advantage to maximize their overall operational efficiency. Investopedia notes that the working capital’s objective is to minimize the cost of capital spent on the working capital while also making the most out of the return on the company’s current asset investments.
For a company to have a positive working capital management, the sufficient balance between assets and liabilities should be prioritized. This often means that there is an excess of current assets over liabilities, giving businesses the freedom to pay off short-term liabilities immediately.
How negotiation impacts company liquidity
Reaching positive working capital does not end with assessing financial assets and how to maximize operational flow. Negotiation and effective communication with both supplier, customer, and other parties that directly affect the company’s financial standing is also crucial.
Negotiation is the heart of every business relationship. A business owner and a supplier participate in a give-and-take agreement that benefits both parties. In fact, a study conducted by Thomas Atkin and Lloyd Reinhart from the Sonoma State University and University of Tennessee, shows that the more cooperative both parties are, the higher the satisfaction for both sides.
The same principle can be applied to working capital management. Namely, when it comes to payment terms in a supplier-business relationship. Mary Duffy, the Chief Financial Officer of a financial process automation solutions firm called SoftCo, stated that negotiating with your supplier to achieve longer payment terms can help with maintaining positive working capital. This gives businesses access to the needed inventory without completely depleting cash reserves.
To obtain a fair deal, clear communication on the credit and payment terms must be reached between company and supplier. It is also important to show how a lengthened payment settlement can benefit the supplier to make them more amenable to the idea.
The same can be said when it comes to a business’ relationship with its customer. Not paying the full amount to the supplier upfront also means that your inventory falls under the accounts payable category. Inventory must be liquidated in order to prevent the supplies from turning into a liability.
One must be sure that a customer is happy with the payment terms without the business having to compensate for a less-than-ideal agreement. As an example, a prospect seeking a number of handcrafted wooden furniture may like the idea of payment terms to extend longer than the industry’s standard. However, this harms the liquidity of the furniture business’ finances as they have designers, carpenters, wood suppliers, and other specialists to pay.
In conclusion, having good bargaining skills can impact a company’s working capital management. Inventory will be well-stocked so as not to lose a customer without overstocking to the point that it becomes a company liability. At the same time, a business owner does not have to worry about depleting the company’s cash reserves as they have negotiated to pay at a later date. This gives the business more flexibility in day-to-day operational costs and future investments.
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