Working Capital and Creating a Culture That Respects Cash
Many companies do not give the right amount of attention to working capital management.
Most financial managers believe that developing a fundraising strategy based on an optimal capital structure following classical economic parameters is sufficient. The truth is these executives do not:
- implement metrics focused on working capital,
- employ the controls necessary for effective working capital management,
- or build a real culture of “cash” among the different departments of the company.
A focus on the following 3 pillars is essential for CFOs serious about improving the performance of working capital for their business:
- In the supply chain strategy
- In the use of data intelligence and new technologies
- In developing a “cash culture” between departments
In the supply chain strategy
The company’s supply chain strategy must be aligned with the financial plan. Factors such as; process improvement, suppliers who meet the company’s payment needs, decreased production times, reduced inventory holding periods, must comply with a criterion pre-established by the financial manager to reduce to a minimum the company’s need for working capital. CFO.University’s tool, the Cash Velocity Calculator, provides a simple means to project your working consumption under different business scenarios you are contemplating.
In the use of data intelligence and new technologies
The use of intelligence on consumer behavior data is vital for making a more accurate demand projections by customers. The company will develop greater knowledge about its customers’ consumption behavior, reducing the need for working capital.
It’s worth mentioning that an excess of inventory causes the company to require large volumes of working capital, generating unnecessary financial costs; on the other hand, the lack of inventory can cause a loss of sales. In this case, data intelligence is vitally important in the management of inventories, adapting it to the sales volume since it will be composed of products that meet the final consumer’s needs. In this way, the company will need less inventory to achieve an optimal level of sales.
Depending on a company’s sector, it may be possible to implement an e-commerce sales program, reducing the need for inventory in various stores since sales will be made from a central warehouse.
The creation of a “cash culture” in the company, on the other hand, is the most challenging mission. The financial manager must have or acquire the leadership skills to drive behavior that builds the desired culture. A key challenge is overcoming the inherent conflict in different parts of the company. For example, sales may choose to give loose payment terms to close the deal, while finance wants tighter conditions to accelerate the cash cycle. Thus, the financial manager’s action is always necessary to understand various sectors regarding the importance of making effective cash management. A key starting point for creating a “cash culture” is getting your team is aligned. Here is a good place to start that journey, Team Alignment: A Proven Method to Drive Bigger, Better and Bolder Results
The role of the CFO in the development of a “cash culture”
Within the “cash culture,” the CFO’s role is vital. The CFO must obtain information from executives in other areas, aligning the needs of the company with the demands of other executives, and thus elaborating a financial plan that balances those needs.
To implement this cash culture, the company must have a CFO with specifics skills to be successful. The CFO must overcome psychological barriers, subjectivity in the analysis of business planning and different financial management codes, and “translate” the financial language into a language understood by executives of other sectors. The CFO must have all these qualities to effectively create value for the company through effective working capital management.
In summary, corporate objectives related to working capital and its various components must be well planned, implemented, and monitored, taking into account the sector to which the company belongs, the competitive scenario, risk factors, and economic conditions in which the company is inserted. By doing this, organizations can improve working capital management performance with an increase in EBITDA and a consequent increase in corporate value.
Once you have a team approach to working capital management prepare for long team capital planning stating here, Treasury - Capital Planning.
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