Cash rich and cost conscious: today’s new blueprint for working capital management

By Gordan Zupanjevac | 26 November 2014

It will not come as ‘news’ that many companies are in a very different place compared to pre-global financial crisis days with some having built up significant reserves which they are deploying in a controlled manner, unwilling to draw down on credit lines. It was recently reported that the FTSE 100 companies have over £50bn in cash on their balance sheets, an increase of over 40% on the previous year.

What this means is that many firms now face new challenges around tracking that cash and holding and deploying it in an effective manner. At the same time, the search for new efficiencies and cost savings remains a priority despite a more optimistic economic outlook. The blueprint for managing working capital has changed and moved beyond the sphere of treasury alone.

International growing pains

Clearly, global expansion has benefited many companies, diversifying their revenue base and supply chain. But with this growth has come the challenge of managing currency volatility. In the last 12 months, we’ve seen companies with operations or suppliers in Asia or Russia for example, particularly affected by revenues, costs and currency fluctuations.

Understanding international markets is crucial for treasurers to effectively manage their company’s cash, and we are reaching a stage where working capital and especially managing inventory is a day-to-day operation. Examining how and from which country or region you are purchasing commodities, as well as in which currency, and tracking price volatility to ensure you have the most favourable hedge in place, is core to treasury’s success.

Increasing control over the supply chain

Overseeing the supply chain has always been a key component of a good working capital programme, and today, we are seeing that oversight moving to more the proactive control of vendors and suppliers. Furthermore some companies that use numerous components in their products and services, such as automotive and aviation firms, are purchasing their suppliers outright.

This naturally provides optimal control of the supply chain but is not the only blueprint to good working capital management today. Another route to increased control is to have better co-ordination and alignment between procurement teams and treasury professionals. Increasingly we are seeing procurement officers, supported by treasurers, looking more holistically at their vendor agreements. Factors to consider include the geographies covered by the contract and the vendor, the terms and conditions of the contract, the contingency plans that could be enacted should anything go wrong with production or supply, and an examination of any additional working capital benefits to signing with a particular firm.

Analysing your suppliers’ payment terms is a traditional way to improve working capital, and keeping company cash in-house for longer is a good thing. But business failures during the financial crisis heightened awareness of how fragile the supply chain can be. Instead of simply extending payment terms, which can cause issues with suppliers, supply chain finance can play a role in supporting key partners and maximising working capital efficiencies.

Leveraging new solutions and technology

Taking the time to look at new solutions can also bring fresh ideas to working capital management. For example, commercial cards can play a key role in providing better control of payment terms. They can also present the opportunity to review existing payment relationships with companies, suppliers and vendors, as well as give access to new metrics.

Improvements in the way a business collects payments can also pay dividends, especially in terms of automation and customer billing. Advances are still being made here and new technology is being put to work. Whilst the simplification of payments processes is essential, of equal importance is having on-demand visibility and access to cash. This means making the best use of available technology and, as far as possible, centralising the processes behind these collections.

More than just treasury

Working capital optimisation is infiltrating many areas of business with performance indicators in procurement, human resources and sales being influenced by the drive to greater operational efficiency and cost savings. Procurement is becoming more involved in financial forecasting and in managing purchasing decisions further in advance.

A review of working capital may start within the treasury team, but success today is contingent on collaborating with others. Whilst we are unlikely to see a wholesale return to pre-crisis days for working capital management, there are now even greater professional opportunities for treasurers to take a company-wide leadership role thanks to the elevation of efficiency to a key corporate priority.

By Gordan Zupanjevac, Strategic Solution Delivery Executive, Global Transaction Services EMEA Bank of America Merrill Lynch

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