Effective working capital management ensures companies have the monetary resources to invest in plants, equipment and technology, and respond to acquisition opportunities. It also affords them the flexibility to repurchase stock, pay down debt or increase shareholder distributions—all of which can boost their credit ratings.

On the other hand, outdated cash management practices and weak controls can compromise a company’s cash position, as well as its ability to drive out costs from end-to-end working capital processes. This is where treasury departments can jump in and help their companies refocus on improving working capital management.

“We’ve actually seen many treasury departments take over management responsibility for working capital,” says Stephen Baird, a Principal with consulting firm Treasury Strategies. “Where this isn’t practical, treasury can still play a leadership role by heading working capital committees and other initiatives within their organizations.”

Such groups measure existing working capital management practices against stated metrics and, based on their findings, develop action plans that promote best-in-class performance. Committee members should represent all areas impacting working capital (e.g., sales, operations, controller, accounts payable and receivable, treasury, etc.) and meet regularly, Baird urges.

Strategic Survival
For some treasury stewards of cash, donning a working capital management leadership hat may prove to be a career necessity rather than a simple quest to become more strategically aligned with overall business operations.

“The classic operations of cash management have become more automated,” Baird says. “Treasury is at risk of being marginalized if it doesn’t expand its scope and skill set to become more involved in other functions of the business. Working capital management is a good place to start.”

Six Techniques to Success
Toward that end, Treasury Strategies offers six techniques to help treasury drive working capital management improvements:

1. Build the foundation through centralization. “You can’t afford to keep functions decentralized—particularly in this era of increased scrutiny over financial controls,” says Monie Lindsey, Treasury Strategies Project Manager. “If you have far-flung operations, you’re probably not utilizing cash efficiently.”

   Instead, she recommends that you manage key functions more directly by consolidating payables, receivables, treasury and purchasing activities via technology, shared service centers and enterprise resource planning applications. Centralization can optimize vendor discounts, improve forecasting accuracy, tighten credit and collections, and reduce idle cash.

2. Integrate your financial supply chain. How do you track inventory and communicate needs to suppliers? Do you have a strategic approach to vendor relationships? Also, consider tools, such as electronic invoice presentment and payment, that encourage Automated Clearing House (ACH) payments and reduce the volume of printed invoices.



3. Make your payments electronic. ACH debits and credits, purchasing cards and check conversion reengineer payments cycles, thereby eliminating mail delays and paper processing costs. They also accelerate funds availability on the receiving side, which improves the accuracy of cash forecasting. Just be sure to implement ACH debit filters or blocks to minimize fraud exposure.



4. Rationalize liquidity management. Deploy the best banking structure possible to ensure effective cash and liquidity management. Close unnecessary accounts and consider single-purpose bank accounts to segregate duties, facilitate reconciliation and identify unusual items. High-order prefix accounts, sub-accounts and zero balance accounts also enhance controls, reduce idle cash balances and accelerate funds availability.



5. Leverage technology to drive workflow efficiencies. The goal here is to accelerate process cycles, standardize policies, improve controls and reduce errors. Effective tools include treasury workstations, credit analytics, lockbox and check imaging, integrated receivables and payments services, and travel and entertainment expense management automation.



6. Institutionalize high performance. “Companies can benchmark against best-in-class performers and tie managerial compensation or bonuses to achieving specific metrics,” Lindsey suggests.

Days sales outstanding (DSO) and days payables outstanding (DPO) are often-used metrics. Other options include balanced scorecards, which measure factors including invoice error rates, exception resolution time, how often invoices post automatically to customer accounts and internal service levels (e.g., minimum standards for customer call-back times).

“By increasing its involvement with working capital, treasury can take advantage of its role as the guardian of a company’s cash to leverage new cash resources,” Lindsey says. “This shift will drive working capital improvements and streamline the fundamental processes that enhance company value.”

 
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