Working capital management – the forgotten link!

Author: Menno Jansen, Project Consultant at TriFinance

Working capital management

As a controller, you play a key role in managing the liquidity need within your organization. Controllers will generally do everything in their power to assess their company’s risks in a timely and correct manner, and to take those measures needed to prevent any liquidity issues. Many of us regard it as a personal responsibility to meet the cash targets set. However, just how realistic is this? Can you, as the controller, exercise direct influence on all the processes, or do you have to influence other departments to take the proper actions on time? And why was it again that you wanted the working capital to be your responsibility and improve the Cash Conversion Cycle (CCC)?

 

Prevent bank intervention

Reasoned from a positive viewpoint, you want to improve the CCC in order to invest money in product development and acquisitions, and in developing staff competences. You can of course borrow that money, but it is often cheaper and wiser to use the financial resources that are available internally. These resources are sometimes so limited that the focus exclusively lies on preventing liquidity issues. Every entrepreneur knows that negative results will not lead to bankruptcy, but that a lack of cash will. It is therefore crucial to convert working capital into cash (Convert-to-Cash). Having a solid working capital management process means becoming less dependent on banks and the associated loan covenants. This allows directors or entrepreneurs the freedom and space to invest in the company.

Exercising direct or indirect influence

Exercising direct or indirect influence on working capital means that you, as a controller, can take action to influence the working capital. However, it may be more effective to encourage other colleagues or customers to step up and take action, as research has shown that the level of the working capital is predominantly influenced by non-financial parties. A practical example within the direct sphere of influence is your creditor’s choice of payment (cash out). No money goes out as long as the finance department does not prepare the payment run or the CFO doesn’t authorize it.

However, when it comes to receiving money you depend on the customer. The invoice may already have been sent, but the customer might not want to make the payment. There could be a number of reasons for this: the quality of the delivery may not be up to par, the invoice may not have been drawn up as agreed or the customer may lack sufficient funds themselves. These types of problems require the help of other departments to get the invoice paid. This means that you have to encourage others to take action, which also means that you sometimes need to step outside your comfort zone to convince others to get involved. You will be met with resistance from your colleagues or customers. They may have other interests at stake, such as ensuring customer satisfaction, as opposed to getting the invoice paid as soon as possible. Issues that can be influenced indirectly are thus more complex to address. This is often literally a tug of war between Operations and Finance.

 

Look out for part 2.