If capital is locked up in the supply chain, or receivables and payables are not being managed effectively, a company is unable to use its cash flow to its best advantage. This could result in higher capital expenditures or the need to turn to the equity or debt markets to supplement cash flow. However, once working capital is locked in, every dollar can support investment and value creation for the present and future.
Adding value to the treasurer’s role in the past, a corporate treasury served as a support center for a company’s business unit. The treasurer’s responsibilities usually included overseeing payments and collections, making cash flow decisions to ensure daily liquidity, and gathering and analyzing financial information to support these efforts through activities such as cash forecasting. However, in recent years, treasurers have begun to play a more strategic role.
One of the toughest challenges facing treasurers today is getting control of global cash. However, the ability to control cash and maximize its use will enable treasurers to assume a more value-added role within corporations.
Current business climate raises stake. Numerous factors are forcing corporate treasurers to optimize their working capital and cost-effectively fund vital business requirements. One of the leading impetuses for corporate treasury to work at its highest possible level is an economy that has eroded revenue and put a greater focus on improving efficiency to maintain profitability. Global competition, global market volatilities, and the demand for increased shareholder value are also dictating optimal working capital processes.
Furthermore, as traditional external funding sources become less available and more expensive, organizations are being forced to find alternatives to debt, which include mobilizing internal liquidity to maximize yields and lower funding costs. Lastly, high-profile corporate governance mandates are driving treasurers to get a clear picture of enterprise-wide cash positions, both to mitigate risk and ensure they have the ability to meet current obligations.
Obtain and manage information more effectively. Getting accurate, real-time information, and finding out where liquidity is are vital to the treasurer’s ability to maximize working capital. This is why treasury workstations interfaced with enterprise resource planning (ERP) systems and their bank’s systems are some of the most powerful tools available to treasurers. ERP provides real-time financial information from every functional department within a corporation. Market subscriptions and web sites also give treasury personnel access to almost all data that effect their company’s operations. Other treasury technology helps to gather, consolidate and report some of this critical information.
The real key, however, is to garner financial value from this influx of information and use it to measure the cost of each financial decision. Treasurers need to have analytical tools to automatically sift through all this data and to provide them with precise strategic information and cost. Without these tools, expenditures on information and data systems are worthless.
Improve working capital processes before a crisis arises. For many corporations and treasurers, working capital management has been viewed as a strategic priority. It is sometimes ignored in favor of other seemingly more urgent or high-profile tasks, such as mergers, acquisitions, divestures or new product launches. Yet, by waiting for a crisis to occur before concentrating on working capital or scrambling to raise cash, treasurers can jeopardize their corporation’s financial stability. Treasurers should consider which everyday tasks could be outsourced, so they can concentrate on freeing up cash.
Make working capital a company-wide priority. Managing working capital can be a daunting task for treasurers to handle alone. There has to be senior leadership buy-in, as well as agreement throughout the whole organization that controlling cash is a priority. The quality of a company’s products or services, how quickly they are delivered, and the level of customer service al impact working capital. For working capital management initiatives to be successful, they must extend to the sales force, the purchasing department, production facilities, and even accounts payable and receivable. (To be continued)