Author: Graham Field

The backroom world of cash management has suddenly been thrust into the limelight. By Graham Field

9 Cash is king.The swath of false accounting scandals in the United States last year reinforced the strength of that dictum. As equity analysts panicked over their ability to understand company earnings and balance sheets, they hit on cash flow as one of the few reliable indicators of corporate health. At the same time, companies have also been focusing much more on cash flows and on techniques of “working capital management” (WCM).

To some, this is a set of familiar principles dressed up in new clothes. “WCM is, in my view, about the right amount of cash, in the right currency, at the right place, at the right time,”says John Nicholas, senior product manager- Europe, global payments and cash management at HSBC. More crudely, says one corporate treasury professional, “It’s about leading and lagging—getting your invoices out early and delaying your payments.” So it’s not perhaps the rocket science some bankers would have us believe. But corporates don’t need telling how important the area is.“Good working capital management has always been vital,” says Robin Graham-Adriani, group treasurer at UK engineering group FKI. “It’s about making sure that cash doesn’t remain unutilized.” What’s been driving the new accent on WCM is the fact that,as Olivier Brissaud,general manager of the Volkswagen treasury coordination center in Brussels, says, “funding is getting rarer,and you have to be very careful how you fund, because it’s expensive—if it’s available at all.”

The advent of the euro has also helped in the adoption of WCM procedures: Companies can now pool their cash across Euroland instead of having to operate separate cash pools in each country. Some businesses are inherently better placed than others to collect cash up front. Insurance companies, for instance, receive premium payments before any payouts, although they do clearly have unpredictable outgoings as claims come in. On the face of it, a big retail group like Tesco in Europe or Wal-Mart in the US has little to worry about;the customer pays on the nail pretty much every time.But it’s inventories that are the potential killer.“If retailers don’t do their cash flow forecasting very rigorously,they risk being out of business in a short space of time,” says Mark Farnworth, treasury manager at the UK’s Royal & Sun Alliance.

By contrast, the timing and lumpiness of payments can be a problem for major manufacturing companies.Manufacturers incur substantial upfront costs for raw materials and labor before receiving payment. To make WCM really effective, corporates need to look at their business practices at the micro level. “WCM is really about the short term,” says HSBC’s Nicholas,“and companies are placing great emphasis on supplier management to ensure that trade terms are optimized in an effort to reduce days-sales-outstanding.” This parallels the steps companies have taken to achieve just-in-time manufacturing. Banks can also offer invoice discounting or factoring and receivables outsourcing to help the process.

The logic of WCM needs to reach right down into the whole way that an enterprise is organized.As David Lock of London-based specialist consultants REL explains, “Sales and marketing people need to realize that their decisions on the terms for customers have an impact on the finance department.” And, says Lock, “companies need to understand that happy customers pay, while putting invoices in the drawer and ignoring them means that suppliers will hit back with tougher conditions or higher prices.” To optimize WCM, companies also need to ensure that the information flow from subsidiaries and divisions is good enough.The banks certainly see this as an opportunity for them.“The key to good WCM is information flow, and a bank that provides deeper and more data-rich information at the right time and to the right place will add more value to a company,” says Richard Challinor, director of enterprise sales at Bank of America in London.

Some companies are happy to do it without much help from the banks.“We have an internal focus on working capital management,” says Henrik Moelgaard, cash manager at Danish pharmaceuticals company Novo- Nordisk. Information from affiliates is “extremely important” to the company, and “there is an advantage because all of them are on SAP platforms, from which the information flows into corporate headquarters.” Because the focus of WCM is often a micro issue,some companies—such as Dutch chemicals giant Akzo Nobel—prefer to do their WCM in the business units, rather than at the overall corporate level.

One potentially wayward component in information flow is a company’s own ability in the black art of forecasting receipts.“There are tools out there, and they’re getting better,” says Challinor,“but a company still doesn’t control the point at which a client pays its bill.”

Challinor says that a group of leading treasurers involved in the think tank Aererium,created by Bank of America,has been engaged in a healthy debate over forecasting.“One very large,well-known European corporate is even moving toward not forecasting cash flow at all and just managing their position intra-day,” he says. One thing Challinor is clear about,however: Electronic solutions are not a panacea.“‘E’ stands for enablement, not efficiency,” he says.Treasurers will still have to work hard to ensure that they have the right funds in the right place at the right time.

10 Commom Mistakes in Working Capital Management
1 Waiting for a crisis before trying to improve working capital practices
2 Believing that working capital management problems can be resolved by the CFO alone
3 Waiting until debts become overdue before contacting customers
4 Handling outstanding disputes in a reactive rather than proactive manner
5 Extending supplier payment terms without considering the opportunity to secure discounts for earlier payment
6 Rewarding sales personnel on revenue booked without considering the quality of those revenues
7 Delaying the issue of credit notes to correct invoicing disputes
8 Trying to achieve a 100% level of customer satisfaction from inventory
9 Equating improvement in days outstanding (DSO) with improvement in cash flow
10 Extending payment terms to customers to avoid offering discounts

Graham Field is a London-based contributor to Global

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