10 critical questions to help corporate treasury own working capital
by Pushpendra Mehta, Executive Writer, CTMfile
Efficient working capital management can help treasurers improve corporate profitability and contribute to enhancing their organization’s financial stability and resilience.
Effective management of working capital is crucial for augmenting organizational liquidity, financial health, growth, and maintaining a competitive advantage.
Corporate treasury is uniquely positioned to understand and improve working capital management, as well as take ownership of this area, due to its comprehensive view of the company’s financial landscape and its attentive eye on overarching organizational objectives and needs.
Furthermore, the significant impact working capital has on the company’s cash flow, assets, and valuation underscores that corporate treasury should not only take ownership of working capital, but also assume responsibility for managing it appropriately.
For treasury to fulfil this responsibility and prudently manage working capital, corporate treasurers must optimise working capital and bring together relevant departments and disciplines towards a unified or shared goal.
To help treasury leaders do so, here are 10 questions that treasurers should consider or ask themselves to rightfully and thoughtfully own and manage working capital:
As a corporate treasurer:
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Do you know why treasury is the rightful owner of working capital and must, therefore carry out the responsibility of managing it efficiently?
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Do you understand the difference between the accounting definition of working capital (traditional formula) and the treasury definition of working capital (alternative or net adjusted working capital formula)?
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Have you considered optimising working capital rather than simply seeking to maximise (increase) or minimise (decrease) your working capital levels in order to accomplish your organization’s goals?
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Have you formed a working capital council and included members in the council from departments such as accounts payable (AP), accounts receivable (AR), procurement, accounting, legal, and tax?
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Have you ascertained that the working capital council has eliminated competing key performance indicators (KPIs) to make room for a single set of agreed-upon KPIs that help each of the above departments support organizational goals?
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Are you performing your role as the owner of working capital by ensuring that all relevant departmental goals, considerations, and concerns are heard and understood?
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Have you made sure the viewpoints and needs of internal business units, customers, and external partners who are not represented in the council discussions are adequately considered and addressed?
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Have you engaged with the council to agree on and set up specific objectives for working capital initiatives?
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Do you work with the council to assess progress and monitor impacts of working capital initiatives, readjusting to enable continuous improvement and adaptation to changing circumstances?
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Do you ensure the council’s leadership team reports the results and working capital initiatives to the departments within its sphere of influence?
By examining these queries, treasurers can transition from merely overseeing working capital to actively and adeptly owning and managing it. This proactive approach enhances operational efficiency, mitigates cash flow shortage risks, and gets all the relevant departments and personnel to pull in the same direction towards adding greater value to the organization.
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