Many companies don’t have formal cash and working capital management in place

Cash and working capital management systems yield operating and bottom-line benefit when firms commit to formalizing this important aspect of running a businesses.

A recent study found that 75% treasurers and CFO’s did not trust their own cash flow forecasts. Most had a good enough view of on outgoing cash commitments although in virtually all organizations unexpected expenses either pop-up or are discovered at a late moment. But a bigger concern among CFO’s and treasurers is about incoming cash – most were uncertain about customers who may slow-pay or default; these are often difficult to predict. The upshot of the study was that cash is often stockpiled in slow economic times (for example during the Obama Administration) as a safety measure and purse strings are loosened only in easier times (are we really experiencing a Trump-bump?). This affects vendors who may appreciate more prompt payment of bills.

During recessions, CFOs and treasurers normally determine the extent to which daily operations can be funded with internally generated cash. To play it safe, many would slow-pay vendors while increasing pressure on customers to get the check in the mail. Cash and working capital levels would quickly improve. But when better times returned working capital and cash would no longer be a priority. Growth and other priorities would take center stage. If it ain’t broken don’t fix it – why bother?

Accounts Receivable, Accounts Payable, Cash and Working Capital

A follow-up research program looked more carefully at best practices in managing AP, AR, cash and working capital. Specifically, the goal was to determine the best practices in use by small businesses. Measurable economic benefits from better working capital processes at the operational level were identified among participating organizations. These firms found strategic benefits to better management of their accounting and finance processes. In other words, strategic goals were reached more often when better controls were in place around working capital management. This included six elements to manage and measure working capital:

Six Elements to Manage and Measure Working Capital and Cash:

  • Accountability for achieving or not achieving objectives – determined not later than during monthly meetings.

  • Process performance benchmarks – how are we going to better manage cash and working capital in the future?

  • Perspective across functional areas – all top management is involved in helping manage cash, not just accounting and finance.

  • Weekly or monthly reports for all top management – so that cash and working capital management becomes a part of their everyday thinking.

  • Defined metrics – For example, what is the exact definition of AR? What is each manager’s goal?

  • Better systems for data-collection, analytics and reporting to management – All of that computing power out there is great, but consistent processes need to be in place so that reliable and comparable reporting is provided to management.

Formal Systems to Manage Cash and Working Capital Yield Big Benefits

All firms need to be concerned with managing cash and working capital, and to get the best gains there is no better time than now to incorporate this into managing your business.

This is one of our core strengths – call us if you need help in this area.