Monday, 18 November 2019

Cash is king in business, and management of working capital has long been a key barometer of a company's health. 

Cash flow management has become even more vital in the current financial landscape. Low interest rates have made it easy for companies to gain access to cheap cash. But as interest rates rise, companies will need to tighten up cash management practices.

A survey of 1,000 U.S. companies conducted last year by REL, a division of The Hackett Group, found companies have more than doubled their level of indebtedness since 2008 to a total of $4.86 trillion in debt. This wouldn't be a concern in and of itself, but the report also found easy credit has created lax working capital management habits which are now taking a toll on many companies' overall operational efficiency. The report said companies showed the worst working capital performance since the 2007-2008 financial crisis.

"With the cost of debt at all-time lows, companies are not penalized for an ineffective treasury system because its cost of borrowing is nominal. The lower interest rates have implicitly resulted in companies not being as proactive as they should be in maximizing productivity," says Joe Petet, Austin CEO at BBVA.

If you are concerned your company is not sustaining optimal working capital levels, here are four steps that may improve your company's working capital position. 

1. Analyze current position

  • Before sourcing cash, the first step is to track your company's current position and pinpoint the real needs.
  • How long is the operating cycle?
  • How quickly does your company collect receivables, and how slowly does it disburse payables?
  • What is the trade-off between carrying inventory that is readily available to customers, versus drop-shipping inventory directly from the manufacturer?
  • Should your company take trade discounts offered, or extend payables as long as the vendor will allow?

With the right level of reporting, you can identify problematic patterns in your company's cash flow. Careful tracking will also allow your company to identify trouble spots such as consistently late-paying customers.

REL's survey found there is a big gap between the best and median performers, with median companies collecting more than two weeks slower, paying suppliers two weeks faster, and holding more than twice as much inventory.

Some important metrics companies should measure are days working capital; days sales outstanding; days payables outstanding; days inventory on hand; and cash conversion efficiency.

Also as part of the exercise, consider looking at your company's internal priorities for the use of cash. Looking beyond the operating cycle to the short and long-term capital needs will provide you a more complete picture of the potential cash challenges facing your company.

Big picture questions matter, too. Are you trying to expand the company, or are you focused on maintaining its current position? Is there an acquisition pending that will require cash?

2. Create an action plan

Depending on the challenge, each segment of your company can contribute to the action plan. An important part of improving cash flow management can be making structural or operational improvements, aligning employee compensation with revamped performance measures, or improving billing and cash collections.

Commercial cash management products can also be part of the solution. These products fall into three categories: 1.) those that enhance your company's ability to collect cash, 2.) those that enable your company to control the disbursement of payables, and 3.) those that provide your company with a clear understanding of where its cash position stands, preferably on a real-time basis, says Petet.

Solutions for collecting receivables can simplify and speed up the process. Commercial cash management solutions can reduce the need for financing options, such as working capital lines of credit, Petet points out.

Any company receiving payments for products or services by check should consider the value of installing one or more lockboxes. Those companies that receive payments from customers across a wide geography should consider a lockbox system, with multiple lockboxes in different cities.

Banks with leading-edge cash management products have systems that will allow incoming ACH or card payments to be reported in lockbox deposit totals, so that all incoming payment information can be uploaded directly into the company's accounting system.

Payable solutions may help your company reduce transaction costs by better controlling when and where company cash is being disbursed. For example, paying by commercial card instead of by check or ACH allows a company to settle payables with its vendors almost immediately, while settling at a later date with the card issuing bank, thereby creating a positive float.

Another big advantage to using cards for payments is that there is no cost to the company for the service. Also, the company receives cash rebates for using cards for payments.

Lastly, commercial cash management products offer companies ways to track account balances and activity as well as collect and disburse cash electronically, either from an office or on mobile devices. Having quick access to real-time financial data can help you make more informed business decisions.

3. Roll out and implementation

Before making changes, it's recommended to communicate to senior managers, group leaders, and team members the full scope of the changes coming, the importance of those changes, and team members' areas of responsibility.

In some cases, customization is required to connect your company's accounting system with the bank or other company providing the solution. Companies generally specify various levels of approval authority for multiple users. Certain solutions may also include security strategies to guard against fraud and cyber attacks. As part of the process, your company may also want to change cash management policies or guidelines, and make sure the new rules are followed by everyone at the company.

4. Continued assessment

Commercial cash management solutions tend to be scalable so they will grow as your business grows. Still, as with any service or vendor, it's smart to check in regularly and re-evaluate whether the solutions your company has chosen are working optimally or if they can be tweaked. There is almost always room for improvement.

A trusted financial professional or banking advisor can help your company identify the trouble spots and propose customized solutions.


The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates. All accounts and credit are subject to approval, including credit approval. BBVA and BBVA Compass are trade names of BBVA USA, a member of the BBVA Group. BBVA USA is a Member FDIC.