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How procurement can help optimize working capital

Spend Management

Cameron Feil

Mastering working capital for smarter procurement decisions

In industries like oil & gas, manufacturing, construction, and mining, it’s vital that businesses maintain liquidity and operational efficiency. Projects in these industries often have long lead times, not to mention significant demands on working capital.

While this has traditionally been a consideration for finance teams, procurement professionals bring a unique perspective and opportunity to cash flow and capital management.

Because they work so closely with vendors, contractors, and suppliers, these teams are in a perfect position to help your business stay ready for anything.

By participating in working capital optimization (WCO) efforts, procurement professionals can help ensure smooth operations throughout the supply chain, meet changing business needs, and maintain steady cash flow.

In this blog, we’ll explore:

What WCO is and why it matters
Techniques for optimizing working capital
Tips for getting procurement involved in WCO efforts

Let’s dig in!

What is working capital optimization and why does it matter?

Working capital is the cash available to support your business’s day-to-day operations. Working capital optimization is the process of maximizing the total cash available at any given time to ensure liquidity.

WCO is critical to business operations for three key reasons:

It ensures you can fund ongoing production.
It ensures you can pay your external vendor workforce.
It helps you meet your production obligations.
It supports preventative maintenance efforts.
It helps pay off expensive debt.

Beyond these immediate needs, though, WCO also offers businesses a means of ensuring stable finances while simultaneously identifying growth potential. By reducing costs and uncovering efficiencies, effective WCO gives businesses a way to unlock a competitive advantage while mitigating all-too-common risks.

How to optimize working capital

Let’s take a look at some of the working capital optimization strategies procurement professionals can start implementing right now.

Close purchase orders faster

Purchase orders (POs) are the official documents that outline the exact requirements your business has for a vendor or supplier. Because of how complex the large-scale projects in industries like oil & gas, heavy manufacturing, and construction can be, POs have a tendency to sit open for a while.

Maybe you’re waiting on additional materials or there’s a delay on work—or maybe it just hasn’t been closed because of unclear processes. Regardless of the reason why, open POs mean some of your working capital is in limbo.

Closing POs promptly gives your finance team greater insight into spend, allowing them to better manage budgets and thus cash flow. Simultaneously, effectively closing out POs means that your suppliers and vendors are paid in a timely manner, reducing the likelihood of delays or work stoppages while strengthening the relationships you have with third parties.

Reduce costs of goods sold

The cost of goods sold (COGS) is another great area for procurement professionals to look at to optimize working capital. COGS is the sum of all direct incurred costs related to the production of goods and services (think materials, components, labor, and overhead costs). Companies typically report COGS as an expense in their income statements.

If you’re looking to reduce COGS, there are a few things to focus on to start:

Assess goods and service providers to identify competitive prices.
Review billing to ensure appropriate payments for goods and services.
Develop contingency plans in case of delays or stoppages with vendors.
Determine if you renegotiate contract terms with vendors and suppliers.

As you develop stronger relationships with the third parties you work with, you’ll be able to identify areas of improvement and opportunities to access discounts. You’ll also get a sense of when it makes most sense to select less expensive options.

By examining these costs more closely, you’ll be able to spot additional savings and value.

Reduce inventory carrying costs

Businesses are always carrying some costs—especially in manufacturing—including unsold inventory and associated storage costs. That adds up quickly, which means more of your working capital is spoken for.

Inventory sitting in storage doesn’t help anyone, least of all your bottom line. Investing in demand forecasting and inventory automation can help you carefully track exactly what’s on shelves at any given time while predicting when customers will need it the most.

Optimize payment terms

One of the themes we’ve hit on in this blog is the need for stronger supplier relationships and the benefits these relationships have for businesses like yours. Procurement teams that strengthen these relationships are in a perfect position to revisit payment terms, contract details, and more to free up additional capital.

Of course, this relies on those strong relationships you’ve built. If you have a pattern of on-time payments and repeat business, then your partners are going to be much more open to revisiting these terms than if you’ve had trouble meeting deadlines.

There are four primary areas to focus on when it comes to optimizing payment terms:

Negotiate longer payment terms with vendors—this will give you more time to pay vendors, giving you increased flexibility with your working capital.
Implement shorter payment terms with your customers—this will help ensure you’ve got cash flowing in.
Consider incentivizing early customer payments—if you can apply a discount to customers who pay early, it’s a great way to improve cash flow and make it more likely to receive timely payments.
Apply invoice financing methods.

Digitize your processes

A through line with all these techniques is the need for greater insight into procurement data. Digitizing your existing processes is critical to identifying areas where you can find greater savings or improve cash flow.

But that digitization isn’t just a matter of taking pen-and-paper information and storing it on a computer. You need to rethink how your data, processes, and policies operate in a digital context if you want to unlock the true potential of your procurement operations.

This digital transformation offers a better way to approach traditional tasks, in turn giving you access to:

Greater efficiency
Data-driven decision making
Enhanced collaboration
Improved risk management and resiliency

Getting procurement involved in WCO

Procurement’s participation in WCO efforts helps you access greater value within your operations and across your supply chain. Getting the ball rolling starts with opening further communication between finance and procurement departments.

Fostering greater collaboration takes time, but with consistency and commitment, these teams can work towards common goals that benefit the entire organization. This partnership is key to optimizing working capital and supporting business growth.

When procurement is involved in WCO, they can help businesses access a host of benefits:

Improved cash flow: First and most obvious, procurement can help businesses negotiate terms and deals that free up more cash.
Stronger supplier relationships: On-time payments and collaborative agreements help build trust and reliability with third parties.
Cost efficiency: A natural by-product of WCO, cost efficiency is enhanced when procurement collaborates closely with finance.
Operational resilience: Companies with access to more working capital are better equipped to handle volatile market conditions and delays.

It takes time and effort, not to mention a fresh perspective, but this collaboration offers unmatched potential for businesses like yours.