Partnership with right provider is key driver

(Conclusion)

Contact customers before payments become overdue. One way to improve receivables status and customer service levels is to categorize customers according to the value of their business, and focus collections on those who owe the most. By contacting those customers who generate the majority of receivables before and not after their payment due dates. Companies can immediately address any problems that could delay payment.

Have a system in place for handling disputes. Companies with strong working capital performance have a dispute management process in place that assigns resolution responsibilities to specific individuals. When disputes remain unresolved beyond a predetermined time limit, they usually become the responsibility of senior staff. A dispute management process is a proactive way of doing business, and it is proven method for improving receivables.

Consider obtaining supplier discounts for early payment. Although many companies negotiate extended payment terms from their suppliers when cash flows are tight, it could be just as valuable and profitable over the long run to negotiate discounts for making early payments. Companies that rely on payment term extensions may find that the costs of their goods and services eventually increase to cover the expense of their extensions. What is more, competitors who pay promptly may be enjoying discounts and other cost concessions that could be difficult to undercut.

Try to balance inventory with customer needs. While some customers may need goods for next-day or same-day delivery, others are willing to wait a week or more to receive shipment. Still others may be satisfied to receive a portion of their order the next day and the rest on a week or two. It pays to talk to customers to determine their specific needs. Rather than trying to have all orders delivered in full from inventory in one shipment, companies can stagger shipments to free up cash, floor space and operating expenses that result from excessive inventory. Many of the companies successful at managing working capital are the best at predicting demands on inventory.

Get an accurate measure of days sales outstanding (DSO). The best way to gauge how much cash is flowing into a corporation is to measure the DSO, which is total receivables divided by total credit sales for the period, multiplied by the days in that period. Presumably, the lower the DSO, the faster a company is converting receivables into cash. However, that is not necessarily the case. A DSO can be low because a company is issuing credit notes to clear disputed items – a practice that does not generate additional cash.

To get a more accurate measure, compare the actual DSO with the best possible DSO (the DSO that could be achieved if all customers paid at their exact payment terms). For example, it all sales were made at 30-day terms, the best possible DSO would be 30. The true performance measure is the difference between best possible DSO and actual DSO. Measure it and break it down into three components: disputed debt, bad debt and delinquent debt – and then address the problems that have created those debts.

Fine-tune receivables, payables and inventory. Any working capital management initiative should include immediate action to improve all three areas in an organization: revenue management (receivables), supply chain management (inventory) and expenditure management (payables). A strategy that encompasses all three will prove to be the most rewarding. For example, recent studies show that large multinationals have improvement potentials in the range of several hundred million dollars. Returns on investment can be as high as 10 times.

Choose the right financial partner. Liquidity management is a key component of working capital management. What is more, liquidity management structure and solutions need to be tailored for every business. When choosing a bank provider, make sure it has the tools, techniques, capabilities and consultative approach to devise the appropriate solution for you.

Conclusion

Like other major supply chain components, the treasury business model is changing and will continue to change. Strategic focus is as important as the tactical day-to-day treasury operations – if not more so. The challenge for the treasurer is to develop and execute the strategy while still ensuring daily operational efficiencies, all within the constraints of the current business climate. New regulatory compliance, additional internal and external oversight, granular balance sheet management, expense and staffing constraints, etc., all vie for time and resources. It is a great deal to balance and, all too often, the strategic, formal working capital program falls victim to the demands of the day-to-day cash management crunch.

Fortunately, there is help available. Treasury is poised to take advantage of the technology-driven productivity gains that are finally being realized throughout the industry. A wide array of working capital and liquidity management tools and techniques to craft specific solutions are now available from the financial service and business software sectors. Partnership with the right provider(s) is the key driver that will most often result in efficient and focused programs to meet both today’s and tomorrow’s treasury objectives.

(Golden is a senior vice president for global treasury services of the Bank of America. – Courtesy of HSBC)