8th Aug 2014 Posted by Warren Paull
In today’s economy, there has never been a better opportunity for finance professionals to focus on improving their working capital. With many options and strategies to choose from, where should managers concentrate their energy and attention? In order for companies to be successful at efficiently managing their working capital, they must keep in mind that it is not solely the finance department’s responsibility.
General Directors are just as responsible; they must have an implemented cash-focused management system where actions can be quantified by performance and overall risk, as well as measuring the company’s total performance. With that in mind, there must be a clear distinction between improving working capital through the constant review of inefficient processes and improving working capital through efficient management of the financial supply chain.
Effective working capital management has become a vital tool for many businesses to be able to maintain sustainable growth. With many factors affecting business activities today, finance executives have seen it become harder to access liquidity from external sources, thus becoming more focused on improving efficiency from within and extracting liquidity.
Finance executives are paying more attention to their current stock levels, reducing accounts receivable and being able to squeeze the best return possible on idle cash. Other alternatives include taking advantage of record-low interest rates and opting to re-finance debt rather than investing the money in a low yielding account.
Keeping unnecessary levels of stock can be a drag on working capital. Some of the problems arise from lack of communication between departments. Also, if the necessary stock level checks (whether they be monthly or quarterly) are not properly carried out and acted upon, they too can become recurring costs for the organisation. The problem can be derived from a simple equation: the more inventory you hold, the more you have to spend on labour to manage it, the more space you need to store it and in some cases, the insurance costs to protect it also increase. These type of problems cause many finance executives to feel as though their hands are tied; robbing them of valuable time that could be better spent on strategic management. Executives must be able to focus their time on effective communication with suppliers, improving the ordering process and increasing overall demand for products.
Beyond outlining an optimal level of inventory, finance executives are also looking at web based cash management solutions like MoretonSmith’s ero57 to reduce and improve accounts receivable efficiency. It allows users to send electronic invoices in multiple languages and multiple currencies. At the same time, payers will be able to review and adjust their invoices accordingly. Also, by moving your accounts receivable online, you will be able to address issues with any accounts before payments become delinquent. It provides you with better accuracy overall and helps strengthen your client relationships.
As with anything, there is no single approach that will entirely meet all of your organisational demands. Much depends on the nature of your business, your specific needs and how well you manage your business’ working capital. However, the points stated above should provide you with a better understanding of some of the issues that may affect your business, along with some proposed solutions and how they can help you overcome inefficiencies.