Download - 8 Ways to Imrove Workng Capital ( 2pages)
8 WAYS TO.
IMPROVE WORKING
CAPITAL
Peter artram
There's never been a better time
for finance professionals to focus
on better ways of managing their
working
capital,
given the wide
range of options available.
So
just
how can an organisation make its
working capital work that bit harder?
Illustration by
or j onaque
Manage working
capital actively
throughout th e
organisation
It's not the responsibility of the finance
department
alone.
Companies should
implement a cash-focused managem ent
system, argues Daniel Windaus, a senior
director at REL Consultancy, which
advises on working-capital issues.
The way to make sure that cash-
focused managem ent happ ens is to use
key performance indicators (KPIs) on
working capital all the way down the
business to operational level. Ensure
that the KPIs are aligned with individual
manag ers' responsibilities.
Cash managem ent should be an
active process, linked to improvements
in working processes, Windaus says,
but m aking better working capital a
company-wide m ission takes time .
Provide awareness training at
manage ment level and activity training
on new processes at ope rational level,
he advises. Changing habits does not
happen overnight, so
firms
will need to
provide ongoing support in order to run
these processes successfully.
onsi er
alternative
fun ing
The bank s' unwillingness to lend,
especially to
SMEs,
has put a strain on
the working capital of many businesses.
John Alexander, an insolvency
practitioner and partner at accounting
firm Carter Backer
Winter
says it's best
:o meet the bank sooner rather th an
later to increase a credit line.
F s
who've had the brush-off from
one of the 'big four' banks could
Financial Management
|
July/August
2 13
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consider moving to one of the up -and-
coming business lenders, such as
Santander or Aldermore Bank, which
opened in 2009 and has lent more than
£lb n to 12,000 small businesses.
But bank loans and overdrafts aren't
the only source of working capital. Firms
are turning to asset-based finance such
as invoice discou nting, while others are
harnessing the power of the web to
raise finance. Rupert Honeywood, for
Instance , raised £71,500 from crowd-
funding sites to start his business, the
Personal Development Bureau.
ay your
suppliers on time
Now there s a coun terintuitive way of
improving your working capital. But
Clive
Adolph, a partner with
PBA
Accoun tants, argues that co mpanies
that pay on time develop better
relationships with suppliers and are in a
position to negotiate better deals.
If you don 't have a good relationship
with your suppliers, you could end u p
not receiving goods when you need
them. And, if you can't fulfil your
com mitm ents, that's not good for your
cash flow either, he warns.
Karen Penney, vice-president a nd
general manager UK for American
Express Global Corporate Payments
Europe, points out that a new EU
directive requires 60-day payment term s
for comm ercial business transaction s.
She says that firms can protect their cash
flow, while ensuring that their suppliers
are paid promptly, by using third-party
payment providers. A company can pay
its supplier, but need not settle up with
its provider for up to
58
days.
Negotiate
discounts with
yoursuppliers
Firms can benefit from discounts
through early paym ent, bulk supply or
regular
orders.
FDs need to con sider
what kind of
leverage
they can bring to
each supplier. One way of driving down
prices as far as possible is to ensure that
the firm has only one point of contact
with each supp lier.
Sometimes it's something as simple as
making sure the supplier is referred to
by the same n ame. Jon Asprey, vice-
president of strategic consulting at
Trillium Software, a data governance
specialist, recalls one case in which a
company had 7 variants of IBM as a
supplier. This mean t that it was very
difficult for the firm to build u p an
aggregate picture of
its
total purchasing .
That in turn made it harder to identify
oppo rtunities for bulk purchasing and
discounts, he says.
Make expenses
more visible
Even expenses claims with small excess
amo unts can have a cumulatively
negative im pact on working capital.
The key is to set clear rules in areas such
as travel and accommodation - and then
to ensure th at the se are followed.
It is imp ortant to have the tools to
monitor expense claims without hu ge
man ual effort. Penney believes that
expense manag emen t tools such as
corporate card programmes m ake
expenses more visible. The detailed
reporting helps businesses to see where
costs can be consolidated, thereby
making forecasting easier and more
streamlined, she says.
anage your
stock actively
Holding unnecessary levels of the
wrong stock can be one of the biggest
drags on w orking capita l. Stock
problems often resu lt from a lack of
communication among different
depa rtme nts. Regular (monthly or
quarterly) stock checks are part of the
answer. But the information emerging
from these checks needs to be reviewed
and acted upon.
The reason that most companies shy
away from inventory man agemen t is
because they fear their safety stocks will
become dangerously low and they w on't
be able to provide the right service
level, explains Hugh Williams,
managing director of Hug henden
Consulting, a supply-chain specialist.
His solution: analyse revenue and
sales of individual produc ts and decide
which should be made to stock and
which made to order .
Manage the
payment process
more effectively
Customers will give all sorts of excuses
to pay late. One of the m ost comm on is
an inaccu rate invoice, so make accurate
invoices a key performance measure for
receivables billing.
Bad debts, a particular drag on
working capital in tough
times,
can often
be reduced by m aking more rigorous
credit checks on new customers a nd
managing credit limits more carefully.
Investigate the
benefits of
e procurement
Daniel Ball, a director at Wax Digital, an
e procurement specialist, says firms hat
have turned to electronic sourcing tools
to aid their buying processes have cut
costs by an average of
18
per cen t. This
serves to ease their working capital.
For example, e auctions help to
create a competitive tension that is often
missing in traditional negotiations,
he
says,
arguing that auctions also make
it easier for buyers to negotiate w ith
suppliers across a wider range of issues,
such as payment term s. You could
factor one supp lier's willingness to
accept 60-day payment terms against
another similarly priced supplier's
refusal to trade on anything o ther than
30-day terms.
Ball adds: The rigorous authorisation
process mandated by e procurement
also stops maverick spending - the
hidd en eater of working capital. i<ivi
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