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Post on: 16 Март, 2015 No Comment

Uncovering hidden profitability

Guest blogger: Aaron Allar, VP, Corporate Banking

From an operational standpoint, you might be feeling good about your business. Your revenues have rebounded and are exceeding pre-recession levels. Youve identified and squeezed as much cost out of the business as you can. Youre pleased with the current structure and terms of your debt profile. What other levers can you pull to uncover more profitability? One area you may not have addressed is working capital optimization.

Solving the cash equation

The Great Recession forced many companies of all sizes to focus on efficient working capital management to preserve capacity and liquidity. Some might still be in business today if they would have managed their access to cash better through the downturn (see Circuit City).

Turning days inventory outstanding (DIO) faster, shortening days sales/receivables outstanding (DSO) and extending days payable outstanding (DPO) is an essential part of freeing up cash in your business and measured by the cash conversion cycle (DIO + DSO DPO). In other words, it is the time between your companys spending cash and receiving cash for each sale.

But dont let a simple formula lead you to believe theres an easy solution to an optimal cash conversion cycle. Several initiatives factor into the equation:

Strategic commitment: Working capital improvements involve streamlining complex operational processes, taking into account the interdependency of sales, procurement, inventory management and payables and receivables management. Bringing all areas of the business together can only be achieved with full engagement from the C-suite on down.

Low hanging fruit: Identify and prioritize quick wins to implement for early momentum.

Accountability: Setting goals in each phase of the process will incentivize employees to stay focused on implementation. Once all phases are completed, measure your companys performance against peers or internal key performance indicators regularly.

Leverage Strong relationships: Having solid relationships with suppliers and customers is a key component to negotiating more flexible, mutually beneficial terms.

Transparency: Align your interests and grow key relationships by opening the book to your suppliers and customers to explain your business, how important they are to it and the metrics you use to define success.

Technology: Most companies have some sort of enterprise resource planning platform, but many arent using it to its full potential. Transitioning to digital purchasing and payment documentation avoids human error while capturing and managing real-time data. This data will be the foundation for setting company performance metrics, staying aligned with the approved strategy and providing predictable forecasting tools.

Key partners: Tracking accurate and robust data enables your banker to understand your business better, allowing them to tailor a working capital facility and cash management solutions to maintain optimal liquidity, maximize your cash availability while managing risk and instituting appropriate fraud controls.

Working capital is your cheapest source of cash, even in todays low-rate environment. As an essential part of cash management, it requires ongoing attention and collaboration across the company. A disciplined approach to optimizing working capital enables you to allocate capital for research and development, pursue strategic acquisitions, invest in higher yielding products, pay down debt and ultimately unlock incremental profitability.