As companies struggle for competitive advantages amid increasingly fierce competition, effective management of working capital is sometimes overlooked as a critical success factor. Every shilling unnecessarily locked up in working capital weighs down performance. Once unlocked, however, these shillings are freed up for investment and value creation for shareholders.
Sound cash management strategies can be the difference between success and failure for a growing business. The emerging company may have a limited track record, often making outside funds scarce and expensive. With aggressive management of the company's working capital components, capital may be accumulated, reducing reliance on outside funds and increasing profitability.
By measuring cash flow, businesses can implement plans to maximize inventory turns, accelerate accounts receivable collections and optimize payables, essentially allowing you to focus on collecting cash faster and parting with it more slowly.
Should you be reviewing your cash-flow system?
You know that your business is a candidate for taking a good, hard look at cash and revenue management practices if the following statements apply to you:
- we have lots of sales, but we never seem to have enough money
- we keep bumping up against our credit limits
- we can't seem to fund our capital needs from operations
- we have spent a lot of money on new accounts receivable/accounts payable systems, but our cash management performance hasn't improved
- we never appear to know what our cash positions are
- we seem to have pools of money that are tying up capital
- our operating lines are drawn down even though the organization has sufficient cash positions
- we have "slow payer" ratings or suppliers demanding aggressive payment terms
What about best practices? In accounts receivable for instance:
- do you use automated invoice matching systems
- have customer statements been eliminated where possible
- is there automatic cash application
- is there a company-wide view of credit exposure risks
- are materiality limits in place for transactions requiring credit approval, for automatically writing off short payments
- is there a performance measurement system in place that rewards effective accounts receivable management practices
Management within growing companies is focused on strategies such as overtaking the competition, growing the customer base and expanding to new markets. All the pressure is on the growth pedal. A side effect of growth can be ballooning inventories and accounts receivable that are rising faster than revenue. Often this leads to a proliferation of inconsistent operational processes and an undermining of asset management. Growth and profitability must be balanced with sound working capital management practices.
To be successful, cash management initiatives require buy-in and support from senior levels of management and logically, should be led by the Chief Financial Officer, or in some cases, the Chief Executive Officer. The best organizations are shifting their focus to a more strategic approach to the finance function, by taking responsibility for performance improvement initiatives that have a direct link to enhancing the economic value of the organization.
Do you need to conduct a Health Check?
If you are experiencing any number of situations listed above, you need to conduct a Health Check. A Health Check incorporates the Cash Conversion Cycle measurements as well as a gap analysis of critical process areas for accounts receivable, inventory and accounts payable management to determine how the organization under review can close the gap between its current practices and the best business practices.
Improving your business's cash-flow management system is critical to freeing up your capital and using it to your advantage. These operational improvements can contribute to strategic success and help sustain your competitive advantage.