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Avoid the cash trap of neglecting working capital

Many companies in need of extra cash spend time and resources on improving their working capital management processes, only to abandon these best practices when the immediate need for cash is past. CTMfile spoke to Informita's Brian Shanahan about how companies can avoid this and maintain their working capital goals across the organisation.

Firms missing out on long-term WCM benefits

Companies often turn to working capital programmes for short- or medium-term benefits, usually when there's an immediate need for extra cash. Instead of using other methods such as borrowing or placing shares to raise funding, a working capital management (WCM) programme can introduce efficiencies into the working capital cycle, releasing cash internally.

This has major advantages – the cost to the company is very low – but one of the great challenges for multinational companies is ensuring they maintain the standards of their working capital programmes in the long term. Very few do this. According to Brian Shanahan, CEO and founder of Informita, only 10 of the 3,000 biggest global companies have managed to maintain a high level of WCM results throughout the last decade.

Four ways to get long-term benefits from a WCM programme

So what are the main challenges preventing companies from harnessing a WCM programme in the long term and what can corporate treasurers do to enable prolonged benefits in the working capital cycles?

1. Measure – and keep measuring

One common problem is that firms aren't measuring their working capital performance, so they don't know how efficient they are in terms of day's sales/payables/inventory outstanding (DSO/DPO/DIO). Few companies are analysing data about their invoices and supplier payments, so they can't see what's really going on or going wrong, according to Shanahan.

2. Don't let expertise fly out the window

Changes in personnel also affects the success of a WCM programme in the long term. Companies often assemble a team to work on the programme but once the project is completed, personnel are likely to be assigned to new projects and – particularly if external consultants are used – a lot of experience is dispersed and lost. Companies should try to keep some continuity in how WCM standards are monitored and maintained throughout the organisation and one way to do this is establish a permanent working capital team. “Personally, I think the mistake most companies make is they break up their working capital team. Keeping the team in place enables the WCM programme to be sustained and improved,” says Shanahan.

3. Reach out across the organisation

The people who actually sustain the KPIs set by a WCM programme are spread throughout the business's different units – in sales, procurement, manufacturing, etc – and the WCM team need to keep them motivated and reminded of the importance of maintaining working capital goals. Policy documents on WCM should be revisited and revised regularly and the company's most senior executives should also support and advocate working capital goals for all the business units. Few companies have a working capital management 'champion' – a senior executive who will look out for what's happening through the company – but it is part of the strategy to maintain the standards of a WCM programme. Shanahan says: “The champion can act as an early-warning mechanism to identify when things start to go wrong and say there's a need to change.”

4. Reward good cash behaviour

“People should be rewarded for meeting cash targets in the same way as rewards for meeting sales or cost targets. You don't see that happen very often, either because people don't budget very accurately at cash level, or because they're not particularly incentivised or punished,” says Shanahan. Again, companies that have rewards and clear performance goals in place for employees even non-financial departments are more able to adhere to best working capital practice. Shanahan adds: “It's very important that people understand what they need to do to meet WCM targets, especially for non-financial employees.”

Conclusion

These strategies should help to raise awareness of the benefits of good working capital management throughout the company and engrain good practice with ways to measure working capital indicators, ways to reward employee performance on working capital goals and maintain a focused team of experienced employees to oversee and sustain working capital targets.

You can listen to the full WEBchat with Brian Shanahan here.


This item appears in the following sections:
Working Capital Management
Order-to-Cash Cycle in WCM
Total Working Capital

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