Companies can die without working capital. As one member of The NeuGroup’s Assistant Treasurers’ Group of Thirty put it during a presentation recently, “Cash is like oxygen.”
So ensuring there is plenty is one of treasury’s top priorities. Banks and other service providers have become very creative in recent years in developing a variety of products to improve working capital, but at a cost; sometimes this is to the company and sometimes to others. At the AT30 meeting, a member presentation showed one member’s initiative to launch a wholesale review of its working capital, cash conversion cycle, and free cash flow. As part of this project the company also reviewed a number of tools currently available in the marketplace, including dynamic discounting, pay cards and age-old solutions like AR factoring.
Attention to working capital often requires a trigger. Based on member accounts, member companies are often driven to a focus on improving working capital when either intentional or unintentional events press them into it. One example cited was of a major global manufacturer that made a large acquisition at the time of the financial crisis and economic downturn – when revenue and cash flow were shrinking. A corporate-wide focus on working capital improvements brought them through that season successfully. The member presenting told a story of different catalyst for its review, but had a similar result. The large acquisition of a rival was highly leveraged and the company has elected to maintain its hefty dividend and capital expenditures. Further, the integration of this large company left the company with a greatly diminished grasp of its cash flow. This increased demand for cash combined with a decreased visibility prompted the company to improve working capital.
When it comes to working capital, treasury’s role is leadership and strategy vs. hands-on tactics. In these cases treasury is going to be the first to identify the problem and is therefore responsible for sounding the alarm. They are also in the best position to orchestrate and execute a plan, starting with getting buy-in from executive management. Treasury has a view to all the sources and uses of cash but they don’t have inherent authority and control. “Treasury can drive the train, but they are not the coal to fuel it,” noted a member. “We are partnering with a lot of other groups.”
Ownership of the working capital components is spread widely at the presenting company, with geographical regions owning their respective receivables and the various business units owning their inventory. Accounts payable is more centralized. The company’s initiative focused on three parts of the WC management process: working capital, cash conversion cycle and free cash flow. The project was very high-profile and overseen by executive committees at the corporate, regional and group level. Work-streams were established for the areas of payables, receivables, inventory, and reporting and forecasting. The project is still in the early stages, but some evaluations of levers and tools have already begun. For disbursements they have begun looking at purchasing cards, dynamic discount and other supply-chain financing solutions. For receivables they are evaluating factoring options, particularly in the rapidly growing emerging markets.
AT30 members who are fortunate enough to have a lot of cash and strong cash flow have often confessed to being complacent about working capital management, particularly when there are other, more pressing matters to attend to. But as some companies will attest, the business environment can change, sometimes quickly, and suddenly demands for cash are exceeding the supply. Proper attention to working capital management simply as a business discipline will ensure those storms can be weathered more comfortably. The downside is there are fewer levers to pull when the pressure comes and you have already optimized your working capital. But no one would ever argue that sloppy working capital management is a buffer for hard times.