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Advanced Working Capital Management


Ken Parkinson Treasury Info. Services
© 2005. Treasury Information Services. All rights reserved.

Session #507

What is Working Capital Management?
Focus on the short term in real time Primary and secondary elements
Primary: Cash, A/R, Inventory, A/P Secondary: ST Investments, Notes Payable

Organizational functions involved
Primary: Treasury, A/R and A/P (Supervision), ST Investment/Debt Secondary: Inventory/Production, Purchasing, Credit, Billing/Paying
© 2005. Treasury Information Services. All rights reserved.


What is Working Capital Management?
Short-term financial management
Current portion of balance sheet Mostly focused on cash flow since cash reflects what happens with WCM

Managing liquidity
Converting non-cash assets to cash Controlling timing of liability payments

Little lead time for decisions or actions
© 2005. Treasury Information Services. All rights reserved.

R E C E I P T S C A S H P A Y M E N T S OUTFLOWS •Disbursements •Payroll Pmts.Working Capital Focus INFLOWS •Collections •Trade Credit •Discounted AR •Inventory Sales •Investment Inc. •Taxes •Loan Pmts. •Loan Draws DRAGS • Uncollected Receivables • Obsolete Inventory • Low Investment Rates • Tight Credit © 2005. •Dividends •Investments PULLS • Early Payments • Shortened Credit Limits • Limited Credit Lines • Low Liquidity 4 . All rights reserved. Treasury Information Services.

All rights reserved. Treasury Information Services.Integrated WCM System Credit ERP System SCM A/R Treasury TWS or equiv . . A/P 5 © 2005.

Working Capital Time Lines Receiver (Payee) Order Entry & Procurement Supply Chain Management Payer (Payor) Supply Chain Management Credit Billing Shipping A/R & Credit A/P & Treasury Transaction Processing Company Treasury Company Treasury Usable Funds © 2005. Treasury Information Services. Banking Services Banking Services 6 . All rights reserved.

financial function Net borrowing and investing position External factors Banking services Interest rates Technology Economic performance 7 © 2005. All rights reserved. organizational structure Sophistication of WCM. . Treasury Information Services.Factors Influencing WCM Internal factors Company size.

such as cash collection. and disbursements Better productivity – benchmark review 8 © 2005. Treasury Information Services. All rights reserved.WCM Diagnostic Review Review of WCM “System” Functional review Best practices Automation – electronic payments and receipts Centralization – of key functions. . concentration.

Treasury Information Services. 9 . All rights reserved.WCM Diagnostics Cash management Level of excess bank balances % fees paid (non-credit services) Investing Level of bank costs Average maturity of investments Comparative return Adherence to policy © 2005.

All rights reserved. electronically % cash applied “cleanly” Inventory Bad debt write-offs Efficiency of supply chain management Supplier “report card” % of inventory > 1 yr. Treasury Information Services. OTC. . old 10 © 2005.WCM Diagnostics A/R & Credit Efficiency of system % deposited via lockbox.

maximum outstanding vs. Efficiency of A/P system % of payments made electronically Uses of direct deposit Borrowing No. of credit line banks % of credit lines used. . total lines available Effective/comparative costs 11 © 2005.WCM Diagnostics A/P. et al. Treasury Information Services. All rights reserved.

All rights reserved. Possible payables stretching “opportunities”? A/P department’s performance? Handling discounts? Other payables savings suggestions? 12 © 2005. 2. . 3. 4. Treasury Information Services.Finding Hidden Cash 1.

Special studies 13 . history. others Best practice utilization Sources AFP/Hackett Group © 2005. Treasury Information Services. goal. per FTE Timing involved Comparison with target Benchmarking vs.Measuring WCM Performance Productivity units of measurement Costs per unit of revenue. All rights reserved.

WCM Benchmarks Cash [management] Costs and bank fees as % of revenue* Days sales in cash (bank balances) ST Investments AFP Investment benchmark for working capital portfolio Comparison vs. All rights reserved. . Treasury Information Services. t-bills or other security *Source: AFP/Hackett Group 14 © 2005.

. All rights reserved. Treasury Information Services.WCM Benchmarks Receivables A/R cost per remittance* Days sales outstanding (DSO ratio) or average collection period Inventory Procurement cost as % of total purchasing cost* Days Sales in Inventory (DSI ratio) *Source: AFP/Hackett Group 15 © 2005.

other firms *Source: AFP/Hackett Group © 2005. All rights reserved. 16 . Treasury Information Services. history.WCM Benchmarks Payables* A/P cost per remittance* Days payable outstanding (DPO ratio) ST Borrowing Comparison with money market rate Comparison with internal goal.

All rights reserved.RFPs The four C’s for RFPs Competition Convenience Commoditization (of services) Cost control Perceived objectivity 17 © 2005. . Treasury Information Services.

etc. What percentage of $ comes into a lockbox? 18 . How are unearned discounts handled? How many customers pay on time? © 2005.) Major points to consider. Develop the “big” picture. All rights reserved.Receivables Review (See Figure 1 for full checklist. Are there processing holdovers? Review follow-up procedures. Treasury Information Services. Track the flow of information.

) Major points to consider. Treasury Information Services. Are bank reconciliations used to develop 19 . All rights reserved.Payables Review (See Figure 2 for full checklist. Is there a “preferred vendor” list? How flexible are terms? Do you have options? Are payments made on time? How long does it take to pay? Are discounts evaluated and/or taken? Proportion of electronic payments? © 2005.

Treasury Information Services.Supply Chain Management “Holistic” view of purchasing Managing the supply chain Substitutions and eliminating obsolete inventory Improving the procurement cycle Maintaining good trading partner relations Evaluating new technologies E-Procurement: Purchasing using the Internet Stronger reliance/alliance with suppliers All electronic © 2005. All rights reserved. 20 .

etc. electronic documents Posted Orders Rcts RFQs & sched & pmts Prcrmt catalog server EC EC Gateway Gateway Payment process 21 Supply management portal Sourcing & procurement Local catalog processes request © 2005. Treasury Information Services. EDI. All rights reserved.The E-Procurement Cycle suppliers Marketplaces catalogs buyer’s virtual catalog 3rd party content managers XML. .

All rights reserved.Inventory Management Motives Transactions – Precautionary – Speculation Approaches JIT MRP (materials resource planning) Combined JIT-MRP approach Paid-on-production or vendor-held inventory Limited use of EOQ-ROP 22 © 2005. Treasury Information Services. .

All rights reserved.Managing Multiple Portfolios Having an investment portfolio and a debt portfolio may be unavoidable Typical situation: investment return < borrowing rate Monitor net difference over time Need to set target for differences Possible “bonus” situations (short-lived) 23 © 2005. . Treasury Information Services.

Major Global Differences Differences Foreign operations often much smaller Standard “tools” unavailable Banking practices and controls Accounting practices 24 © 2005. . All rights reserved. Treasury Information Services.

All rights reserved. . Treasury Information Services. payment handling Non-bank-related problems: payment disputes Internal company problems: non-payments Lack of working capital focus or mind set 25 © 2005.Potential Problem Areas Local financial transactions Bank-related problems: funds transfers.

All rights reserved.Costs of Ignoring Locations Higher interest expenses Slower collections Increased receivables costs Inefficient payable practices Lost opportunities 26 © 2005. Treasury Information Services. .

Treasury Information Services. All rights reserved.What Lies Ahead for WCM? More technology (and impact) Less drags on payment systems Faster “cycle” for WCM Enabling integration of WC elements Further business consolidation Changes in approaches Ability to deal with risks Slow growth of e-commerce © 2005. Impact? 27 .

. and systems compatibility? How will the outsourcing “movement” affect working capital management? Will the growth of mega-companies in all businesses. including banking.Key WCM Issues How will further integration of working capital elements occur? Is e-commerce going to be a major agent of change for working capital management? How will external parties. affect how working capital is managed. Treasury Information Services. be a positive or negative force on working capital management? 28 © 2005. especially with regard to payments. information. All rights reserved. such as banks.

Treasury Information Services. All rights reserved. Traps Avoid lapsing into the details too quickly Don’t take shortcuts Avoid assuming what your ERP system will provide Avoid outside services based on cost savings Don’t assume nonresponse from an area means “no problems” 29 .Tips and Traps Tips Keep a big picture focus Know where things are— have a road map Tap into as many company systems as possible Use outside services efficiently Spend time on communications © 2005.

.Any Questions? 30 © 2005. Treasury Information Services. All rights reserved.