How To Reduce Working Capial

Transcription

1 Cash Managemen Laura Greenberg Liberaing Cash Reducing working capial levels Well-capialized companies are posiioned no only o survive he financial crisis oday, bu also o emerge vicorious and hrive when skies urn blue again. Esablishing and adhering o igh working capial sandards enables a firm o coninue is operaions wih sufficien funds o boh saisfy mauring shor-erm deb and mee upcoming operaional expenses. I is no surprise ha many companies are saggering under he burden of oday s financial crisis. Even he mos opimisic execuives see no near-erm signs of improvemen. Cash is igher han i has been in decades, and we are seeing companies sruggling o aain sufficien liquidiy during he ongoing credi crunch. Many have already aken acion o reduce capial spending across he board, while ohers are gearing up o do so. Copyrigh 2009 by he Associaion for Financial Professionals. All righs reserved in all counries. AFP Exchange I 49

2 2008B Cash Managemen CTPs & CTPAs Working Capial Managemen (WCM) fron and cener The curren financial crisis has elevaed decision-making relaed o working capial and shor-erm financing o op-of-mind for oday s execuives. Alhough working capial is a simple concep, managing i is made difficul by he complexiy of he business around i. A focus on shor-erm earnings wihou concurren discipline on cash and working capial has defleced he aenion of many companies from he basics, where cash is king. As a resul of he global naure of large organizaions along wih he diversiy of sysems, processes, organizaions and measures of performance many companies are surprised o find ha hey are holding excessive levels of working capial. Since free cash flow is a key influencer of shareholder value, and may be criical o a company s survival, organizaions are sriving o free up he inernal cash rapped wihin heir differen working capial componens. Raher han relying on exernal bank financing, we are seeing savvy companies argeing working capial reducions o unlock and accelerae cash invesed in he business. Cash-opimizaion effors should be recession-proof. No only does i pay o opimize cash hroughou he enerprise during an economic downurn, bu ough imes acually demand added emphasis. In many companies, he curren liquidiy crisis has exposed flaws around properly managing cash and working capial. I has elevaed he saus of cash opimizaion from a sporadically considered opion o an ongoing business imperaive. Those companies ha are able o release heir rapped cash, ha have he means o forecas cash effecively and accuraely and ha adhere o igh working capial sandards will have a compeiive advanage in hese roubled economic 50 I AFP Exchange April 2009 imes over hose companies ha do no address working capial aggressively. Conversely, complacen companies could find hemselves facing disasrous liquidiy shocks or, wors case, bankrupcy. Reducing he need o finance working capial is criical. By far, he bes source of liquidiy and he cheapes financing sem from reducing he need o finance working capial. Small changes in Days Working Capial ousanding can have a dramaic impac on cash flow acceleraion. In our experience, simple improvemens o receivables, payables and invenory processes ypically resul in lower operaing coss, improved cash flows and beer cash-forecas accuracy. From where we sand, WCM is an effecive lever o increase cash flow and preserve, or even o enhance company value. Bu more imporanly, for many companies oday, i may be he necessary key o survival. Effecively managing he relaionship beween a firm s shor-erm asses and liabiliies will accelerae cash flow. Wellcapialized companies are posiioned no only o survive he financial crisis oday, bu also o emerge vicorious and hrive when skies urn blue again. Esablishing Company Value Working Capial and adhering o igh working capial sandards enables a firm o coninue is operaions wih sufficien funds o boh saisfy mauring shor-erm deb and mee upcoming operaional expenses. Asses + profiabiliy = liquidiy? No always. Having ready access o cash when opporuniies arise is a company s icke o achieving is sraegic objecives quickly, wheher ha be acquiring weakened compeiors o increase marke share or adding new produc lines or expanding ino new geographies or all of he above! However, a company can be endowed wih asses and profiabiliy and sill be shor of liquidiy if is asses canno readily be convered ino cash. Leading companies are using WCM as a key lever for building liquidiy. Working capial and shor-erm financing decisions involve effecively managing he relaionship beween a firm s shor-erm asses and is shor-erm liabiliies. This can be broken down as follows: Working capial = Cash + (Accouns Receivable + Invenory) - (Accouns Payable) - Curren porion of deb As depiced in Figure 1, he Accouns Receivable (A/R) and Accouns Payable Figure 1: Working capial managemen is an effecive lever o increase company value Operaing Margin Capial Employed Receivables Invenory Payables Terms of paymens Fas processes Error-free bills Aggressiveness Responsibiliy Transparency Transparency Responsibiliy Planning qualiy Availabiliy Srucural complexiy Working Capial Driver Copyrigh 2009 by he Associaion for Financial Professionals. All righs reserved in all counries. Fixed Asses Terms of paymens Paymen processes Responsibiliy Opimizaion discoun vs. ineres

3 Figure 2: The working capial managemen cycle Forecas o fulfill WCM Sraegy Cash Flow Opimizaion Order o cash Procure o pay (A/P) and Invenory financial accouns represen componens of he business ha have significan impac on an organizaion s financials. To quickly access cash when obligaions or emerging opporuniies require i, leading organizaions are finding ways o collapse he ime in heir cash conversion cycle (CCC). The CCC is he ime duraion in which a company is able o conver is resources ino cash ha is, he oal ime required o conver resources ino invenories firs; hen o conver invenories ino finished goods; nex o conver finished goods ino sales; and finally o conver sales ino cash. This is depiced in Figure 2. Cash managemen anoher consideraion Going hand-in-hand wih working capial managemen, reasury aciviies in cash managemen and cash flow forecasing are inegral o acceleraing and concenraing cash efficienly, enabling a company o pay down deb, inves cash safely, engineer he capial srucure or allocae he capial back ino business opporuniies for even higher reurns, as depiced in Figure 3. Treasury managers have urned previously cursory relaionships wih he A/R and A/P deparmens ino powerful eaming and inernal consuling relaionships wih a common goal o improve working capial merics across he organizaion. Treasurers have seized his opporuniy o break down he silos and become champions for he businesses. Opimizing cash flows. Below are jus a few examples of pracices ha companies can adop o help opimize cash inflows. These are basic cash managemen services and pracices ha can produce significan improvemens and should herefore be reinforced: Leverage your banking parner s capabiliies. Bank accoun srucures and services are commonly available from banks o accelerae cash collecions, help opimize floa and increase invesmen reurns conservaively. This may mean convering check and wire paymens o ACH/EDI elecronic remiances o deposi cleared cusomer funds o he bank accouns quickly while also auo-hiing open invoices for faser cash applicaion. In he U.S., i is imporan o revisi lockbox locaions every hree o five years o help find he mos advanageous collecion floa wih he bes locaions and he fases bankprocessing speeds. Consider remoe deposi scanning. If cusomer checks are erroneously sen o corporae headquarers or bached up a field locaions, raher han being reroued back o a lockbox or driven o a bank branch once a week, hey can be swiped in he office on a scanner using he remoe deposi bank service. They will be elecronically deposied ha day wihou even leaving he building. Tap your buffer cash. Raher han ignoring buffer cash balances ha are jus siing in subsidiary bank accouns, link hese asses o Figure 3: Improving liquidiy requires considering he enire Financial Value Chain (FVC) Sales process Order-o-cash Maser daa Sales order/call off Billing Collecions aciviy Dispues Cash in Tradiional reasury: Shor erm cash managemen Procure-o-pay Maser daa Purchase order Invoice receip scanning Sock managemen Invoice approval Cash ou Procuremens process World class reasury Improved forecasing, beer risk managemen, enhanced WCM Copyrigh 2009 by he Associaion for Financial Professionals. All righs reserved in all counries. AFP Exchange I 51

4 Cash Managemen concenraion accouns o maximize heir use. Generae real-ime cash reporing. I is frusraing o many companies ha real-ime cash visibiliy may only exis wihin bank accouns in Norh America or pars of Europe wih heavy reliance on ed spreadshees or monhly rial balances from business unis. Ye, acual bank balances and ransacions can be obained elecronically from many counries a major banks several imes a day hrough a muli-bank reporing service. If a CFO wans o know wha he company s global cash balance is on a given day a reasonable reques he quesion should be answered wihin an hour. Besides leveraging hese cash managemen ools, reasury deparmens mus work closely wih heir ax counerpars o build efficien inernaional noional or physical pooling banking srucures or inercompany lending programs. This may help preven cash balances from being rapped (visible bu no managed) in-counry wihou a legiimae, ax-effecive mehod of repariaing cash o he legal eniy where i is bes used (e.g., o pay down deb). Cash receip and disbursemen forecasing. Rigorous forecasing of cash receips and disbursemens go hand-in-hand wih he objecives of working capial managemen. Economic uncerainy will always impac companies, bu proper business focus and aenion sill apply o cash forecasing, boh in good imes and during financial urmoil. Those companies wih he means o forecas cash well will have a decided advanage. The boom line. Consisency in core cash funcions will enhance value going forward bu requires senior managemen buy-in and consan suppor. To unlock cash wihin a large organizaion requires a groundbreaking change o managemen accounabiliy. This may mean incorporaing cash flow accounabiliy ino business managemen s incenive compensaion program, hereby rewarding cash flow performance and accurae forecasing and penalizing mismanagemen of cash. Leading companies appoin senior managemen champions or sponsors o oversee cash forecasing improvemen effors a paricularly ho opic righ now. Treasury deparmens can be anicipaory and lead he charge. Leveraging WCM surviving, hriving and building value For decades, we have winessed companies aking an ineffecive now we focus, now we don approach o managing heir working capial focusing on collecions, payables and invenory during periods of cash consrains and relaxing ha focus during imes of capial prosperiy. Now, as par of a new discipline brough on by he financial crisis, leading companies are embedding effecive working capial managemen and associaed ools ino susainable daily processes o eliminae hose hisoric ebbs and flows and minimize relaed business risk across heir cusomer and supply chain base. Given curren marke condiions, many companies may find ha i is already oo lae o obain significan exernal funding. In order o susain fuure aciviies, hose companies need o begin immediaely o ake sock of heir liquidiy sources and reduce working capial levels o saisfy heir liquidiy needs. Bu for hose forunae companies wih ready access o cash and a srong balance shee, he credi crisis may acually presen opporuniies o ake advanage of weakened compeiors and realize sraegic advanage. Wellcapialized companies are posiioned o inves in R&D and adverising, acquire compeing companies ha are srapped for cash, grab op alen from companies ha can no longer afford hem, seal marke share from heir compeiors and seize oher such opporuniies o mee heir planned growh objecives. Laura Greenberg is a consulan in he Finance Advisory pracice of PricewaerhouseCoopers (PwC) LLP in New York. Greenberg s experience includes working capial managemen and finance ransformaion. Since joining PwC over four years ago, Greenberg has focused on evaluaing, developing and implemening working capial and finance process improvemens for large global organizaions. The informaion conained in his documen is provided as is, for general guidance on maers of ineres only. PricewaerhouseCoopers is no herein engaged in rendering legal, accouning, ax or oher professional advice and services. Before making any decision or aking any acion, you should consul a compeen professional adviser PricewaerhouseCoopers LLP. All righs reserved. PricewaerhouseCoopers refers o PricewaerhouseCoopers LLP, a Delaware limied liabiliy parnership, or, as he conex requires, he PricewaerhouseCoopers global nework or oher member firms of he nework, each of which is a separae and independen legal eniy. 52 I AFP Exchange April 2009 Copyrigh 2009 by he Associaion for Financial Professionals. All righs reserved in all counries.

5 Copyrigh 2009 by he Associaion for Financial Professionals (AFP). All Righs Reserved. This elecronic documen is designed o provide auhoriaive informaion in regard o he subjec maer covered. I is no inended o offer accouning, legal or oher professional advice. If accouning, legal, or oher professional advice is required, or if exper assisance is needed, he services of a compeen professional person should be sough. Reprined from AFP Exchange, All inquiries should be addressed o: Communicaions Deparmen Associaion for Financial Professionals 4520 Eas-Wes Highway, Suie 750 Behesda, MD Fax: AFP@AFPonline.org Web: by Associaion for Financial Professionals (AFP). All righs reserved.