Working capital is priority one

Working capital and cash preservation are top of mind for finance professionals in the wake of the coronavirus pandemic. According to a recent Association for Finance Professionals (AFP) survey, finance pros rank protecting cash as their top priority, and organizations are taking significant measures to build “liquidity buffers” in case conditions worsen.

Seventy percent of survey respondents reveal they are delaying capital expenditures, and many organizations are delaying hiring new employees (69%) or have implemented a hiring freeze (61%). In addition, 88% of respondents are prioritizing cash forecasting with a longer forecasting horizon, reflecting an increased focus on liquidity.1

With a potentially prolonged recovery, businesses that effectively manage their cash will ensure the working capital needed for continued operations.

Companies with cash are more agile, stable and perform better

“Businesses with more cash are more agile and more competitive,” the AFP reports. They are “more stable and better positioned to weather volatile economic conditions without having to resort to expensive shortterm financing.”2

The report also states that in every industry and in companies of all sizes, top-performing organizations manage their working capital up to four times better than their below-average peers. Even marginal improvements in working capital management can free up significant sums of cash.3

How to unlock working capital when it’s needed most

The key to effective working capital management is accessing locked-up cash in three distinct areas where best-in-class principles make a difference: payables, receivables and liquidity management. Implementing capital management strategies that include optimization, improving controls, managing risks, and streamlining processes in these areas can deliver positive results for your organization.

Control payables to increase cash on hand

Nearly 28% of companies make payments before vendors require them.4 Cash paid out earlier than necessary could be put to use in other, more pressing ways. Taking a few more days to pay your bills — and timing payments with your collection cycle — can keep cash in your pocket longer.

• Optimize the payment mix: You are not required to pay all of your suppliers in the same way. An appropriate mix of payment types — card, ACH, wire, and checks — can extend your days payable outstanding (DPO).
• Improve controls and risk management: The pandemic has unfortunately increased occupational fraud and other risks. Tightening internal controls and identifying and addressing payables risk is imperative to smart cash management.
• Streamline processes: A healthy payables process eliminates errors and waste, ensures that invoices and payments flow smoothly, and gives executives insight into the payables stream.

Balance receivables for better cash flow

For many companies, timing and collection are the biggest challenges in working capital management.5 Shortening your payment cycle brings cash in the door faster, but a smart receivables strategy involves a delicate balance of discounts, volume negotiation and payment terms. Appropriate receivables management also acknowledges that relationships matter, so it’s important to proceed with specific customers in mind.

• Optimize the collection mix: Every business has a mix of customers, and terms that work for one might not be right for another. Be strategic about using discounts and appropriate terms for different customers based on volume and value.
• Improve controls and risk management: The goal is to maximize cash flow while minimizing the risk of fraud, error, and loss. Your credit and collection policies must reflect segregation of duties and other solid risk management procedures.
• Streamline processes: Does your business have a billing and collection plan in place that will accelerate cash availability for your working capital needs? Now’s the time to fine-tune your AR processes to meet your pandemic recovery goals.

Understand short- and long-term liquidity needs

The COVID-19 crisis requires a new look at liquidity and cash management. Your liquidity needs for the short term are likely very different than they’ve ever been. New cash flow forecasts are required to understand your short- and longer-term liquidity needs.

Sound liquidity management involves a deep dive into your bank account structures and fund allocation strategy to ensure you’ll have the cash you need when you need it.

Optimize your bank account structure: Implementing a strategic bank account structure allows your company to minimize fees and maximize cash visibility. This means better use of funds and instant access to your day-to-day cash position and liquidity profile.

Better fund allocation: Optimal asset allocation helps you minimize risk, maximize return and ensure the liquidity you require for operations. As the pandemic continues and resolves, you’ll need to revisit this mix frequently.

If there were ever a time for more agility, stability and better performance, this is it. Good working capital management has a direct impact on a company’s performance, enabling the organization to maximize cash, improve costs and efficiencies, manage risk and achieve strategic benefits.

Unlock the cash you need — now and for the future.