This document discusses keys to successful working capital management. It begins by explaining that working capital management involves ensuring a company can fund short-term assets with short-term liabilities. However, many CFOs struggle with identifying drivers of working capital and setting the appropriate levels. The document then discusses factors that influence working capital performance, such as external constraints and internal silos. It stresses the importance of cash flow forecasting and considering various scenarios. Finally, it provides several ways companies can improve their working capital position, such as educating personnel, streamlining disputes, and setting achievable targets.

1. Two Readings on
Working Capital Management
Keys To Successful Working Capital Management
From the perspective of the Chief Financial Officer (CFO), the concept of working capital management is relatively
straightforward: to ensure that the organization is able to fund the difference between short-term assets and short-
term liabilities. In practice, though, working capital management has become the Achilles' heel of scores of finance
organizations, with many CFOs struggling to identify core working capital drivers and the appropriate level of
working capital.
As a result, companies can be limited in their ability to weather unforeseen or adverse events and ensure that cash
is readily available where it is needed, regardless of the circumstances. By understanding the role and drivers of
working capital management and taking steps to reach the "right" levels of working capital, companies can minimize
risk, effectively prepare for uncertainty and improve overall performance.
Factors Influencing Working Capital Performance
For most CFOs, the greatest challenge with respect to working capital management is the need to understand and
influence factors that are out of their direct control, in order to obtain a complete picture of the company's needs.
The CFO's span of control can be limited in terms of functional silos, though corporate finance may well have some
powers of influence over operating units.
While organizations generally concentrate on the right processes, such as cash, payables and their supply chain,
they are less likely to take into account various internal and external constraints that can dictate how effectively
those processes are executed. For example, the legal and business environments can have a significant impact on
performance. Similarly, internal considerations as such as organizational structure, shared systems, autonomous
business units, multinational operations and even information technology can impact working capital, creating
barriers that can hinder a CFO's ability to truly understand, and therefore manage, the company's needs.
The human factor is another important consideration. If management is focused purely on top-line growth,
insufficient attention may be applied to cash flow management and forecasting. A hard-line focus on year-end or
quarter-end results can produce a flattering, but inaccurate, picture of working capital performance and lead to
counter-productive behaviour. Consider the impact on working capital of a year-end sales push, where production
has been building up inventory (which may not be the appropriate inventory) to meet this artificial demand and the
quality of receivables deteriorates during the early part of the following year.
While there is no magical solution for effecting robust working capital management, there are a number of
prerequisites for gaining control of the complex process.
Cash Flow Forecasting
Proper cash flow forecasting is essential to successful working capital management. To do this effectively,
organizations must take into account internal and external working capital drivers and consider the sensitivity of
those drivers to changes in the business or market.
Various questions need to be asked: How will unforeseen events impact working capital requirements? What if a
sudden market downturn or upturn occurs? What if the company loses a major customer? What happens if a major
competitor takes a significant action to improve its market position? Since each of these could have a sizable impact
on the business, organizations must assume that the only certainty will be uncertainty, and prepare accordingly.
in addition to assessing the cash flow impact of potential events, companies should consider the possibility of
having to make additional working capital investments. That's because events could affect non-operational cash
requirements such as investments, credit ratings and the ability to service debt, as well as inventory, payables and
receivables.
Companies must implement contingency plans that take a holistic view of the organization in the context of a variety
of different challenging situations. This will help minimize the adverse effects of unforeseen events and provide
financial flexibility in uncertain times by having working capital as a ready source of cash.
How can you manage uncertainty? The three fundamental approaches are: control it, predict it, react to it. The most
successful approaches are based around one approach, but contain elements of all three. Market-leading
companies, perhaps not surprisingly, are in the best position to manage uncertainty, often enjoying the ability to
control supply, minimize inventory and apply payment pressure on customers. Companies with less influence,
however, must rely more heavily on a strategy of prediction. To properly prepare for events and improve or maintain
performance during times of uncertainty, organizations must develop an objective, business-driven view of the role
of working capital. Without real insight into true working capital drivers, a company may be able to produce a
reasonably good consolidated forecast, but find that accuracy drops considerably when it comes to producing
divisional, operating unit or even a product-line forecast.
Beyond Balance Sheets

2. The most effective programs for both improving working capital performance and forecasting are those that look
beyond the local organization and consider the broader corporate environment. Corporate investment and financing
arrangements, for example, may provide for cash to be delivered by one location, but utilized at others. Restrictions
on the repatriation of cash, internal inefficiencies in moving cash, delays driven by banks and sometimes-
inadequate access to information can make the process problematic.
Cash generated in one country, for example, many not have the same value to the organization as cash generated
in another. As a result, companies must plan global working capital improvement initiatives in the context of the
ultimate use for the cash, rather than simply managing local balance sheets.
Improving Working Capital Management
Successfully improving working capital management requires a multi-pronged approach. Companies must seek
granular detail to identify the underlying drivers of working capital. This requires separating perception from reality
and pinpointing impediments to efficient cash flow, such as poor links between production and billing or clumsy
treasury operations.
Companies must also adopt an entrepreneurial mindset. They must act quickly to drive change by combining
operational and financial skills, and expand their thinking beyond the finance organization to gain a more complete
view of overall operations. Rather than wait for the perfect solution, they must identify and implement strategies that
result in quick wins, generating short-term cash to fund longer-term projects.
Having the right people in place can also make or break the effort. Companies need to identify individuals who can
be responsible for setting targets and performance levels and be held accountable for delivering. These
professionals should be encouraged to challenge the status quo and drive change, using cross-functional teams.
Measured Approach
Finally and this is where many projects fail, companies must remove emotion from the analysis process. All
initiatives must be business-case driven, and projects without measurable results or those not contributing to overall
goals should be abandoned. Companies must agree on success criteria, prioritize based on contributions to these
criteria and continuously measure performance.
While working capital forecasting is critical to a company's ability to make informed strategic business decisions,
many CFOs struggle with the process because of a lack of control and real insight into the underlying drivers of their
working capital needs. By empowering the entire organization to understand the company's true working capital
needs, companies can successfully reduce their financial risk, prepare for uncertainty and create a ready cash
reserve that will provide flexibility and security during difficult times.
This article was written by Andrew Harris, senior director, Alvarez & Marsal, and originally
appeared in Financial Executive Magazine.
11 Ways Companies May Improve Their Working Capital
Position
With interest rates continuing to rise, oil and commodity costs mounting and ever-increasing pressures from Wall
Street to increase shareholder value, it's surprising that some companies are not taking more measured steps to
drive effective cash management and increase free cash flow.
Working capital is a highly effective barometer of a company's operational and financial efficiency and effectiveness.
The better its condition, the better positioned a company is to focus on developing its core business. By addressing
the drivers of working capital, in fact, a company is sure to reap significant operating cost and customer service
improvement.
According to an analysis of financial results from the 2,000 largest companies in the U.S. and Europe performed in
2005 by Hackett-REL, U.S. and European companies have reduced working capital by 12 percent and 17 percent,
respectively, over the past three years. This strongly indicates that awareness of the benefits of working capital and
cash management improvement has been elevated beyond the treasury to the office of the CEO.
Excess Cash
But while corporate profits may be soaring, corporations are still overlooking billions in cash a staggering $460
billion in the U.S. and some $570 million (€469 million) in Europe. This enormous sum is literally stuck in transit, a
result of inefficient receivables, payables and inventory practices that could be reclaimed with relatively little
investment.
Hackett-REL, which is part of The Hackett Group, a strategic advisory firm, calculates that in the U.S. alone, getting
this excess under control would reduce total net debt by 29 percent, increase net profit up to 11 percent and
improve return on capital employed (ROCE) from 13.9 percent to 15.1 percent.
Liberating the billions in cash trapped on the balance sheet is easier than one may think. Dell Inc., for instance a
lauded for overall strong corporate management and working capital performance builds a computer only when it

3. has received payment for an order, and doesn't pay its own suppliers for an agreed-upon period of time thereafter.
As a result, Dell enjoys negative working capital and, the more it grows, the more its suppliers finance its growth.
Not all companies can operate like Dell, but most can improve their working capital position by at least 20 percent
over time if they pay attention to the following list of cash management do's and don'ts:
1) Get educated. There is more to working capital management than simply forcing debtors to pay as quickly as
possible, delay paying suppliers as long as possible and keep stock levels as lean as possible. A properly
conceived and executed improvement program will certainly focus on optimizing each of these components, but
also, it will deliver additional benefits that extend far beyond operational rewards. All this underscores the need for
ambitious executives to integrate working capital management into their strategic and tactical thinking, rather than
view it as an extraneous added bonus.
2) Institute dispute management protocols. Consider a case where a company's working capital is
deteriorating due to an increase in past-due accounts receivable (A/R). A review of the past-due A/R illustrates a
high level of customer disputes, which are taking on average of 30 days to resolve and consuming significant
amounts of sales, order-entry and cash collectors' time.
By tackling the root cause of the disputes in this case, poor adherence to pricing policies the company can eliminate
the disputes, thereby improving customer service. Established dispute-management protocols free up time for
sales, order-entry and cash collections' personnel to be more effective at their designated roles, and they also will
increase productivity, reduce operating costs and potentially boost sales. And finally, days payable outstanding
(DPO) and working capital will improve, as customers won't have reason to hold payment.
This example illustrates how working capital is one of the best indicators of underlying inefficiency within an
organization and why it is critical that senior executives remain focused on addressing the primary causes of
working capital excesses to control operating costs and remain competitive.
3) Facilitate collaborative customer management. One of the most important cash management and
working capital strategies that executives CFOs and treasurers, as well as CEOs can employ is to avoid thinking
linearly and concerning themselves solely with their own company's needs. If it is feasible to collaborate with
customers to help them plan their inventory requirements more efficiently, it may be possible to match your
production to their consumption, efficiently and cost-effectively, and replicate this collaboration with your suppliers.
The resulting implications for inventory levels can be massive. By aligning ordering, production and distribution
processes, companies can increase inherent efficiency and achieve direct cost savings almost instantly. At this
point, payment terms can be most effectively negotiated.
4) Educate personnel, customers and suppliers. A business imperative should be to educate staff to
consider the trade-offs between various working capital assets when negotiating with customers and suppliers.
Depending on the usage pattern of a raw material, there may be more to gain from negotiating consignment stock
with a supplier instead of pushing for extended terms - particularly in cases of long lead-time items or those that
require high minimum-order quantities.
The same can hold true for customers. Would vendor-managed inventory at a customer site provide you the insight
into true usage to better plan your own production? It is important to remember, however, that this is not the solution
for all products, and it should be evaluated on a case-by-case basis.
5) Agree to formal terms with suppliers and customers and document carefully. This step cannot be
stressed enough. Terms must be kept up to date and communicated to employees throughout the organization,
especially to those involved in the customer-to-cash and purchase-to-pay processes; this includes your sales
organization.
Avoid prolific new product introductions without first establishing a clear product-range management strategy.
Whether in the consumer products or aluminium extrusions business, many companies rely heavily on new
products to maintain and grow market share. However, poor product-range management creates inefficiency in the
supply chain, as companies must support old products with inventory and manufacturing capability. This increases
operating costs and exposes the company to obsolete inventory.
6) Don't forget to collect your cash. This may sound obvious, but many businesses fail to implement effective
ongoing collection procedures to prevent excess overdue funds or build-up of old debts. Customers should be
asked if invoices have been received and are clear to pay and, if not, to identify the problems preventing timely
payment. Confirm and reconfirm the credit terms. Often, credit terms get lost in the translation of general payment
terms and what's on the payables ledger in front of the payables clerk.
7) Steer clear of arbitrary top- down targets. Too many companies, for example, impose a 10 percent
reduction in working capital for each division that fails to take into account the realistic reduction opportunities within
each division. This can result in goals that de-motivate employees by establishing impossible targets, creating
severe unintended consequences. Instead, try to balance top-down with bottom-up intelligence when setting
objectives.
8) Establish targets that foster desired behaviours. Many companies will incentivise collections staff to
minimize A/R over 60 days outstanding when, in fact, they should reward those who collect A/R within the agreed-
upon time period. After all, what would stop someone from delaying collections activities until after 60 days when
they can expect to be rewarded? Likewise, a purchasing manager may be driven by the purchase price and
rewarded for buying when prices are low, but this provides no incentive to manage lot sizes and order frequency to
minimize inventory.

4. 9) Do not assume all answers can be found externally. Before approaching existing customers and
suppliers to discuss cash management goals, fully understand your own process gaps so you can credibly discuss
poor payment processes. Approximately 75 percent of the issues that impact cash flow are internally generated.
10) Treat suppliers as you would like customers to treat you. Far greater cash flow benefits can be
realized by strategically leveraging your relationship with suppliers and customers. A supplier is more likely to
support you in the case of emergency if you have treated them fairly, and, likewise, a customer will be willing to
forgive a mistake if you have a strong working relationship.
That said, also realize that each customer is unique. Utilize segmentation tactics to split your customers and
suppliers into similar groups. For customers, segmentation may be based on criteria including, profitability, sales, A/
R size, past-due debt, average order size and frequency. Once segmentation is complete, it is important to define
strategies for each segment based around the segmentation criteria and your strategic goals.
For example, you should minimize the management cost for low-margin customers by changing service levels,
automating interaction, etc. Finally, allocate your resources according to the segmentation, with the aim of
maximizing value.
11) Celebrate success in hitting targets. Emphasize the actions that helped you get there. Ask your people
to remember what it felt like when they hit the target so they can motivate themselves to hit it again.
Summary
Following these do's and don'ts will allow companies to optimize cash and highlight internal inefficiencies that must
be remedied to better serve customers. Moreover, these cash management best practices will enable companies to
build stronger partnerships with suppliers across the total working capital value chain ultimately, translating into
improved bottom-line results.
Source: W.B. Girmes & Company: M&A Resource Library . This article originally appeared in
gtnews and was written by Andrew Ashby, President, Europe for The Hackett Group and Hackett-
REL .