Optimizing Working Capital by Sameer Gemawat
Effective working capital optimization techniques can help ease liquidity pressures in the immediate term — and in the longer-term, companies with optimized working capital management should be better positioned to shift their focus towards growth.
Throughout the COVID-19 crisis, we have witnessed significant volatility and dislocations that have roiled cross-border supply chains, financial and commodity markets, and the cost and availability of funding. While governments and central banks have unleashed significant firepower to ease the supply of credit, the operating environment remains fragile and prone to ongoing uncertainty.
These headwinds are of particular concern to companies that fall into sectors that are most impacted by the ongoing dislocations — such as energy, transport and hospitality. Within those and other impacted sectors, companies with high debt-to-earnings ratios that are simultaneously grappling with material revenue pressures will continue to feel the most stress as they seek to stabilize their balance sheets.
Drawing on lessons learned from the global financial crisis, we have seen a strong correlation between proactive working capital strategies and earnings per share (EPS) growth over the cycle, as companies with the most efficient cash conversion cycles registered EPS growth rates 1.5x compared with their peers between 2008 and 2011.
Taken together, this suggests that effective working capital optimization techniques can help ease liquidity and funding pressures in the immediate term. Whenever the recovery begins, companies with optimized working capital management should be better positioned to shift their focus towards growth.
There are times when additional working capital must be found to fund obligations to suppliers, employees, or other third parties while waiting for payments from customers.
So, consideration of all these components can avoid less than ideal cash flow hiccups.
When it comes to setting out your short-term and long-term working capital strategy, here are some points to consider:
1. Digitize, digitize, digitize
The acceleration of digitization is emerging as one of the dominant themes since the start of the crisis. In this context, you could explore the following:
Use bank platforms or industry tools
Migrate to direct presentment
Utilize e-invoicing and e-bills of lading
Use online receivables management tools
Shift from check to electronic payments
2. Mobilize for quick-wins
There are likely solutions you have in place today that could help drive incremental working capital improvements. Examples of these include:
Explore discounting Letters of Credit (LCs) or Bills
Re-launch dormant Single Use Account (SUA) or card programs
Ramp up enrolment in Supply Chain Finance (SCF) programs
Expand existing Accounts Receivable (AR) programs
3. Build for the future
You could also start an analysis to prioritize opportunities that can potentially deliver the greatest benefit for your organization, such as:
Investigate Export Credit Agency (ECA) support options
Review entire receivables portfolio
Implement integrated payables solutions
Explore off-balance sheet inventory financing
Too often, it happens that the working capital optimization depends on traditional linear approaches that fail to take into account a holistic look at the company’s entire cash picture.
Be bold!!! Challenge yourself!!
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