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

43

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

 

C o p y r i g h t o f F i n a n c i a l M a n a g e m e n t ( 1 4 7 1 9 1 8 5 ) i s t h e p r o p e r t y o f S e v e n P u b l i s h i n g G r o u p      

L t d a n d i t s c o n t e n t m a y n o t b e c o p i e d o r e m a i l e d t o m u l t i p l e s i t e s o r p o s t e d t o a l i s t s e r v      

w i t h o u t t h e c o p y r i g h t h o l d e r ' s e x p r e s s w r i t t e n p e r m i s s i o n . H o w e v e r , u s e r s m a y p r i n t ,    

d o w n l o a d , o r e m a i l a r t i c l e s f o r i n d i v i d u a l u s e .