Working Capital

Working Capital

Working capital is a firm’s inventory and all its Cash. The CFO is generally in charge of monitoring the changes in working capital because it is such a critical flow of Cash and inventory; it is important to maintain cash flow forecasting so there isn’t an unexpected demand for Cash. “Many companies are surprised to find that they are holding excessive levels of working capital. Since free cash flow is a key influencer of shareholder value, and may be critical to a company’s survival, organizations are striving to free up the internal Cash trapped within their different working capital components. Rather than relying on external bank financing, we are seeing savvy companies targeting working capital reductions to unlock and accelerate Cash invested in the business” (Greenberg, pg., 50). Management should consider making simple improvements in receivables, payables, and inventory processes. Overhauling these systems can turn up cash flows that are bogged down.

Let’s start with receivables, make faster processing times, be transparent, and ensure that all a company’s cards are on the table so that no hidden rules will cost the company or the customer more money. It is the responsibility of the CFO and all that fall under them to ensure that the customers are experiencing error-free billing and maybe even some aggressiveness to make sure that payments are being made promptly.

Inventory is another part that should be looked upon to free cash flow by maybe looking into the JIT system, as the initial cost will more than pay for itself by illuminating the warehouse owned and operated by the company. Outsourcing and joining forces directly with distributors can benefit both parties. Suppose the distributors have access to direct inventory. In that case, they can better serve the company’s customers quicker with faster service to inventory being sold, and it will also show them what is not making it in sales. When this happens, it allows less spoilage or reduced inventory by putting things on sale that may be out of date or out of season. This system also allows for a better TQM (Total Quality Management). This means that management can deliver a better quality product by insuring better inspection; because they are dealing with less inventory, they can focus on the quality of the merchandise, not just the quantity shipping out.

Payables is another area where changes can be made to trim up cash flows by faster payment processing. Optimization discounting allows customers to get discounts on their purchases by paying early instead of getting charged interest by paying late. It is up to the company to ensure that it is responsible for making its payments and keeping customers updated on their billing and payment schedules.

Working Capital Management depends on the managers, some are more aggressive with the company’s money, and some are more conservative. Still, you will never find two that look at all cash flow adjustments similarly. The CCC (Cash Conversion Cycle) is how long it takes to turn merchandise into Cash. The faster a company can cycle through this cash flow, the better off the company is as far as product turnover-duct and having liquid assets for more purchasing for investing in improving shareholders’ profits.

Cash management goes with WCM because treasury activities that manage Cash and cash flow forecasting are an important part of accelerating and concentrating Cash efficiently. By doing this, it allows a company to pay down debt, it allows them to invest Cash safely, and it allows them to move capital around or structure it into business opportunities that could be turned into getting higher returns.

Optimizing cash flows with remand and electronic deposit immediately gives the company more liquid Cash. Banks’ lock boxes can also push deposits through quicker by processing more than one or two payments daily. Improving forecasting for the company’s financial needs has become more than just the CFO’s job. They must work with accounts payable and inventory control personnel to ensure enough product and cash flow to purchase more products. It would also help if a company could give itself better risk management so that it can foresee problems before it put a strain on cash flow.

A company’s so-called treasurer is tasked with optimizing working capital components such as DIO, DSO, and DPO. “As global economic growth slowed during the great recession, many corporations experienced working capital surpluses as inventory levels declined, DSO metrics stabilized, and global cash balances increased. In recent years, as the global economy returns to growth, treasurers are tasked with proactively managing working capital as businesses expand into new markets and geographies, which can lengthen the cash conversion cycle by extending DSO and DIO” (Person, 2014).

Financial Supply chains have become an important part of a growing global company, as well as physical supply chains. How a company manages its cash flow is an integral part of how well it is being run. They re-run in sync with each other if they are at their optimum. “The financial supply chain involves the flow and use of cash throughout the physical supply chain, where there is an accompanying flow of cash in the transfer of products, services and analytics” (Williams, 2012).

This means managers and treasurers must work together in such a global marketplace because staying on task will be essential to keep their supply chains moving forward. Whether it is the financial or the physical supply chain, when both parts coincide, a company can be run efficiently and especially profitable.

The world is a big place with commerce moving very quickly. Suppose a global company does not stay at the forefront, consistently updating and overseeing its supply chain. In that case, it will become a weak target, with bigger and stronger companies able to take advantage of it or control them altogether.

“Well capitalized companies are positioned to invest in R&D and advertising, acquire competing companies that are strapped for cash, grab top talent from companies that can no longer afford them, steal market share from their competitors and seize other such opportunities to meet their planned growth objectives” (Greenberg, pg., 52).

References 

Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).

Boston, MA: Cengage Learning. ISBN: 9781285867977.

Greenberg, Laura. (April 2009). Liberating Cash Reducing working capital levels. Retrieved November 29, 2016, from https://www.pwc.com/us/en/issues/surviving-the-financial-downturn/assets/liberating-cash.pdf

Person, Greg. (July 25, 2014). Leveraging an Effective Working Capital Strategy to Reduce the Cash Conversion Cycle. Retrieved December 4, 2016, from http://www.kyriba.com/blog/greg-person/leveraging-effective-working-capital-strategy-reduce-cash-conversion-cycle

Williams, Robert. (June 27, 2012). How to Optimize Working Capital Throughout the Financial Supply Chain. Retrieved December 4, 2016, from http://businessfinancemag.com/treasury/how-optimize-working-capital-throughout-financial-supply-chain

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Assignment: A summary of the topic you have chosen for the Course Project and its importance in the healthcare industry. The length of the outline should be approximately 1-2 pages in length and include the following:
Identify the topic you will be writing about.
Define the problem that you will be trying to suggest a solution for.
Identify possible solutions.

• Discuss how you would improve cash flow, given the CFO does not have enough cash to pay operating bills promptly.