Cash Flow Working Capital
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Cash is king! Best practice fundamentals for improving working capital

Cash is king

The COVID-19 pandemic generated economic volatility, labour shortages, and supply chain disruptions that impacted the working capital of many businesses and forced them into survival mode and the adoption of more conservative strategies. Aside from the fluctuating business recovery in the post COVID-19 era, there are now legitimate concerns around the forecast of difficult economic conditions in 2023, as highlighted by CreditorWatch in its recent snapshot Economic Update – October 2022.

The ability to effectively manage working capital is becoming even more difficult. As interest rates increase and the cost of credit rises, the pressure also increases on organisations to free up cash from their operations and improve cash management. Several other factors such as rising financing costs, persistent inflation, and high inventory levels are pushing organisations to improve how they manage and optimise their working capital.

There is an alternative to significantly impact your organisation’s ongoing profitability and financial sustainability. A part of a broader focus on improving asset efficiency and a cheaper alternative than relying on credit or external debt. This alternative is equally as important but less visible (think balance sheet) and it revolves around working capital management.

Current challenges to optimising working capital

Working capital is a simple business concept. Many organisations face various internal challenges that prevent them from unlocking access to more cash and the ‘free’ cash hidden within the balance sheet. Unfortunately, what is equally difficult to recognise is the conscious requirement for working capital improvement but also to understand what steps are required to improve sustained cashflow.

Some of the challenges to improving working capital are:

  • Limited access to necessary information such as real-time data to evaluate the effectiveness of their working capital strategy.
  • Lack of formal structure and stakeholders’ ownership
  • Too many stakeholders and competing perspectives
  • Time constraints due to other business priorities

Best Practices for working capital management

The optimisation of working capital management represents a systematic challenge for many organisations, but it is a fundamental part of the overall corporate strategy. Working capital management requires ongoing stakeholder awareness, cross-functional collaboration, and consistent but standardised practices throughout the organisation – a holistic and comprehensive approach to determine where greater efficiencies and cost savings can be achieved.

Only a fraction of organisations successfully apply best-practice methodology in their pursuit of “cash-excellence”. Ideally, organisations that excel at working capital management also excel in the continual search for improvement, with aspiring to the recognition of best-practice approach. Therefore, an effective working capital management strategy is vital for an organisation’s survival.

Recognise working capital as a source of value

Working capital is not a straightforward task, but many organisations have put into practice robust measures to improve cash management, accounts receivable, accounts payable and inventory management. But expert guidance on what is ‘best practice’ is scarce, industry specific, and hard to visualise what is a common approach.

Despite these challenges, the financial benefits alone are worth the extra effort involved. With better management of working capital, this preserves cash and can provide a critical lifeline when the business faces significant trading or liquidity constraints. CFOs and executive teams must embed a ‘cash excellence’ mindset throughout the whole organisation and build upon their cash management capabilities.

Internal research to build actionable planning

An effective working capital management strategy is researching the current stability of an organisation, understanding who their customers are, identifying the target market for new customers and planning for growth opportunities. Unless the executive team have a deep understanding of the organisation’s key performance metrics (KPIs and KRAs) and alignment to their long-term strategic goals, they will not be able to prepare actionable planning to effectively manage working capital in the future.

Reduce potential impact on customers, suppliers and partners

Improving working capital management can affect customers, suppliers, vendors, and partners. Building strong, transparent, and supportive external relationships is the key to flexible working capital policies but these must be mutually beneficial and can be readily adapted to normal business cycles. Organisations must look for methods to simplify processes and eliminate costs but being mindful of how these change initiatives may affect other areas in the value chain.

Conduct more Cash Flow analysis

Ongoing economic uncertainty and the difficulty for organisations with satisfying customer demand because of labour shortages and supply chain disruptions can potentially impact cash flow and working capital management (over an extended period). Consideration must be given to the short-term or long-term impact and how that determination will affect cash flow estimates – what is important to note is that historical patterns may not materialise within a one year period.

This means that treasurers are developing forecasts in unprecedented circumstances. Cashflow monitoring must be conducted more frequently than in the past, but information should also be shared across your organisational silos through more coordinated communication, education, and collaboration. Sharing such information insight is vital to cashflow forecasting accuracy and proactively planning for fluctuations in working capital.

Gain more insights into your organisation’s Cash Conversion Cycle (CCC)

The Cash Conversion Cycle (CCC) is a working capital metric that measures how many days it takes an organisation to convert cash into inventory, and then back into cash via the sales process.

  • Benchmarking! Explore your organisation’s Cash Conversion Cycle (CCC) measurement to your competitor’s model, or similar industry, or similar revenue size, or target best practice organisations, by evaluating the trends and results.
  • Measure your current Cash Conversion Cycle (CCC) v. previous cycles (inc. EOFY periods) to evaluate whether working capital is deteriorating or improving and determine whether the results are considered ‘normal’ or ‘not normal’, but relative to your industry sector (and standards).
  • This provides an indication of baseline result and a further opportunity to review your processes, align your approach, and then improve your organisation’s Cash Conversion Cycle (CCC).

NOTE: The preference for any business will be striving for a lower value of the Cash Conversion Cycle (CCC) as it indicates healthy working capital levels, positive cash-flows, liquidity, and profitability.

Identify areas of opportunity

The potential working capital improvement will eventuate but only with a solid understanding of the existing cash situation. This step will always require cross-functional collaboration across the organisation and to identify all opportunities, by assembling individuals (or teams) who are enthusiastic about leading change and with a history in working capital deliverables.

Cash Management

  • Deliver efficiencies by centrally managing cash, funding, and foreign exchange for the whole organisation by not only helping reduce overall cash needs but also drive business behaviour and actions.
  • Promote and engage best practice in forecasting across the organisation, with regular education, follow-ups with subsidiaries, and escalation of inaccurate forecasts to build awareness (within each business function) as to how their work activities affect cash performance.

Accounts Receivable

  • Install rigorous collections and risk management by improving the processes to monitor collections, disputes management, track slippage with predictive metrics, and identify emerging trends.
  • Provide constant reporting analysis back to sales and operations to tailor customer engagements and remediation action.

Accounts Payable

  • Improve payment discipline by overhauling internal supplier payment authorisations and processes.
  • Improve the timing of supplier payments, lengthen supplier terms to navigate short-term gaps in cash flow and manage rebates to drive customer support (and growth).

Inventory Management

  • Identify inventory reduction opportunities but without compromising on service levels or risking stock outages.
  • Identify and rationalise underperforming SKUs, stock cycle counts, slow moving stock lines, with robust action plans to focus on core products and simplify operational efficiency.

Prioritise areas of opportunity

Working capital opportunities are ranked (by priority) and create a working capital roadmap, with actionable planning. This roadmap must support the company’s strategy and business objectives – actions that can be implemented immediately to preserve liquidity, while designing more complex longer-term initiatives in parallel.

Rapid Actions

  • Will free up working capital and can be executed immediately without justification.

Discrete Actions

  • Actions accomplished with minimal system or process changes, by ‘value driven’ and backed with high-level analysis, but not an in-depth appraisal.

Complex Actions (Initiatives)

  • These are initiatives that will be dependent on executing IT systems (ERP, SaaS, BI) or process changes.
  • A ‘high-level and detailed’ analysis is required to validate the opportunities and then, who leads this team engagement.

Improve processes first, then automate with SaaS technology

Before technology can even be discussed as an option for improving working capital, organisations must put the right change management processes in place and embed cultural change. By initiating change to break down departmental silos, this allows for cross-functional processes to be unified, employees begin to ‘work smarter’ and belief (with commitment) intensifies across the organisation.

Working capital management is a strategic process that addresses efficiency from multiple angles and key business segments. But unlocking working capital requires visibility and control from across the entire enterprise, which is gained from collaboration across teams and then implementing the right technologies (ERP, SaaS, BI) to enhance productivity. The undisputable fact is that advanced technology is essential to optimising working capital.

The option to implementing critical technology improvements should always be a viable alternative to doing nothing!

Undertake a working capital project

The working capital roadmap is your guide to assign clear direction and ownership of your initiatives. Set up a compliance governance structure (track and monitor progress) as your success will be measured by the following four items:

Engagement from executive team

  • Ensure the working capital program is sponsored by the CFO and executive team, who function as ‘cash-excellence’ role models for your organisation.

Clear Tracking

  • Use a dashboard with simple but robust key performance indicators (KPIs) to make progress visible, keep your executive team and the whole organisation informed of progress.
  • Ensure metrics are aligned with overall strategy, goals, and communicated across the organisation.
  • Metrics may change year-to-year as your strategy changes, but make sure your KPIs are specific to your industry and organisation.

AGILE Principles

  • Embed AGILE principles across your key stakeholders, teams, and to drive accountability with quick feedback to facilitate remediation action (if required) but to fast-track progress and alignment.

Realign Incentives

  • Align your incentives plan to include new working capital metrics to managers and individual teams.
  • This indicative focus beyond just the P&L (Revenue, Expenses) and to provide transparency of the importance of working capital.

Alternative financing: Is it a viable option (or not)?

Supply chain financing can benefit customers and suppliers but if used in a responsible way. Facilities can be extremely attractive and have limits that change with the level of trading activity and of course with seasonal funding requirements. When used well, facilities help bridge the ‘funding gaps’ that businesses must manage (where suppliers are paid in advance of sales being converted into customer collections).

The same for invoice financing (debtor finance, cash flow finance, accounts receivable finance), which is another way businesses can improve their cash flow. While more businesses are using invoice financing to ’unlock cash’ from the value of their unpaid invoices to improve working capital, there is still a cost to be factored into the decision-making process.

This is about balancing risk versus benefit and because each organisation, industry sector, markets, and customer segments are vastly different – think fit for purpose and not one-size fits-all.

Reduce cash leakage by challenging internal processes

Any financing may also be a risk. A facility should only be considered, but once a business has managed (and optimised) the efficiency of its working capital cycle, so that the requirement for the facility is clear, sizing justified, and ROI benefits are appropriate. Supply chain finance or invoice finance will not solve issues associated with historically poor working capital management. In fact, it can often exacerbate these issues and access to financing may typically decrease due to poor internal processes, results, and risk frameworks.

Executives and their management teams should challenge their own organisation (including key stakeholders, teams, individuals) and do their homework – firstly, to optimise the working capital cycles of their business, and secondly, implementing robust processes to drive not only responsibility but also accountability for delivering (vs target) working capital metrics. This helps to provide a clear understanding of the underlying gaps in working capital management and clarity in terms of any residual ‘funding gaps’ that may need financing.


Working capital drives cash flow and more cash means more flexibility for organisations with making smart business decisions to reduce capital needs and fund business growth regardless of their size, structure, and industry sector. Businesses that continually make decisions within their functional silos and not holistically across the entire organisation will frequently fail to optimise any working capital improvements.

The importance of ‘best practice’ in working capital management is building a ‘cash-excellence’ culture across the organisation. A strong disciplinary working capital initiative leads to instilling committed disciplines in operations and drives significant gains in resource productivity and profitable growth. This redirection by your executive team places a commitment on long-term business decisions and strengthening the awareness of a ‘cash culture’ across the organisation. Your process champions (and change agents) are selected to help build cross-functional collaboration and stakeholder management, but with a sustained focus on change management.

Are you ready to implement “best practice” in optimising working capital? Then, simply accept the Change challenge and commit to a unique rebuild of your working capital.

cashmanagement optimising workingcapital
John Field, CEO & Founder of Reworq Consulting, an SME advisory and management consultancy which focuses on servicing Small-to-Medium Enterprise (SME) businesses, with navigating their scalability challenges and business change adoption. John has over 30 years’ experience in Finance, Project/Risk, and Working Capital disciplines spanning a diverse range of industries across the Asia-Pacific, and USA regions. He is a strategy thought leader who has advised organisations (and led teams) that struggle with disruptive change, project / risk governance, and working capital initiatives.
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