Cash & Liquidity Management

Working capital optimisation

Published: Jul 2018
Gears over money notes

Treasurers are increasingly playing a more central role within the organisation when it comes to optimising working capital. Where are the opportunities for treasurers to drive improvements in this area – and which challenges are likely to arise along the way?

Working capital management is a perennial concern for companies around the world – and in today’s environment, corporate treasurers are paying closer attention to this topic than ever before. So where are the most attractive opportunities for optimisation?

It’s clear that working capital optimisation is nothing new. “Capital has always been an expensive and scarce commodity for businesses to set up, run and grow,” says Varoon Mandhana, Senior Advisor, APAC Solutions, Treasury Services, J.P. Morgan. “A good part of this capital is tied up in day-to-day running of the business in the form of cash, payables, receivables and inventory (collectively referred to as working capital) besides other capital investments.”

As such, working capital is a significant concern for companies around the world – and one in which treasurers can play a key role. “This is a subject that is on every corporate client’s agenda,” says Michael Vrontamitis, Head of Trade, Europe & Americas at Standard Chartered. “Treasury is becoming much more focused on working capital management as technology evolves and we move into the real-time world. This is being driven by the emergence of real-time payment systems and real-time information, particularly in Asia where developments like Alipay, WeChat and others are blazing the way.”

Of course, not all companies are equally focused on this topic. Vrontamitis observes that the competitiveness of particular industries may affect the extent to which working capital optimisation is seen as a priority. “For example, working capital management techniques are heavily used in the retail industry,” he says. “Margins in this sector are thin, so treasurers are particularly focused on any techniques that can help transfer risk, improve DPO and reduce costs for suppliers.”

In contrast, Vrontamitis notes that high-margin, cash-rich industries like oil and gas have traditionally placed less focus on working capital. However, he says that some of these sectors have seen increased pressure on their margins more recently – leading to a greater focus on conserving cash via working capital management.

Unlocking working capital

There are considerable opportunities to tackle this area more effectively. PwC’s 2017 Working Capital Study found that for companies in Asia, cash is increasingly locked up within lengthening working capital days. The report adds that with one of the worst net working capital days (NWCD) positions, “the average Asian company is well-placed to focus on releasing this cash to reverse current capex levels and stimulate return on capital employed (ROCE) improvements”.

Mandhana explains that companies that are able to optimise the use of capital through effective working capital management are able to generate higher ROCE by reducing their overall capital base and improving shareholder value. “Cash released through working capital optimisation presents an opportunity for companies to potentially retire expensive debt, internally fund projects and acquisitions as well as pay back shareholders,” he adds.

Venkat ES, Head of Asia Treasury Product Global Transaction Services at Bank of America Merrill Lynch (BofAML), adds that the efficient use of working capital is particularly critical today. “For one thing, working capital is especially important in the current market, where growth rates are moderate compared to the days of double-digit growth,” he says. “Secondly, with the pressure on margins and ROCE coming under severe strain, large enterprises have to rely on working capital optimisation to deliver better results.”

Venkat also cites the significance of evolving sales models in this area. “The model is changing from traditional sales to online sales,” he notes. “And this will have a significant impact on companies’ cash flows.” Indeed, a report published by the GSM Association last year in collaboration with Boston Consulting Group, Embracing the Digital Revolution, notes that digital technologies will influence up to 45% of all retail sales in India by 2025.

Taking action

There are many reasons for focusing on working capital management – but how can companies tackle this area effectively?

For one thing, it’s important to look broadly at the different components of working capital: days payable outstanding (DPO), days sales outstanding (DSO) and days inventory outstanding (DIO). Companies can improve working capital in a number of different ways, such as by taking longer to pay supplier invoices – and, conversely, by collecting payment faster from customers. While benefits can certainly be gained by focusing on one of these areas on its own, these can be limited. A more effective approach is to tackle the full range of working capital metrics, while also taking into account the impact on the company’s buyers and suppliers.

“In the past, a lot of companies have focused only on getting benefits on the payables side by delaying payments to their suppliers,” says Venkat. “But increasingly companies are focusing on receivables and inventory as well.” Where receivables are concerned, the goal is to collect and reconcile payments as quickly as possible – and this is an area that Venkat says any company should be focusing on. “There are clear opportunities, irrespective of industry, for them to adopt the tools and solutions that are being developed both by banks and third parties,” he explains.

Adding value

Working capital optimisation is an activity that extends across many different parts of the organisation. So where can treasurers add value to this process?

“While traditionally working capital optimisation has been a CFO-led and shared responsibility, treasurers are now playing a more strategic and pivotal role in company-wide efficiency initiatives,” says Mandhana. “Treasuries have a lot to bring to the table, considering their visibility over cash, cash management expertise and increasing role in managing financial risk and bank relationships.”

Promoting cash culture

Mandhana explains that treasuries are taking a lead role in working capital optimisation initiatives in a number of ways. For one thing, he points out that treasury is “uniquely positioned to promote cash culture throughout the organisation, not only by improving cash visibility and forecasting but also by building awareness within each business function about how their activities affect company cash performance.” He notes that both finance and the broader organisation – ie sales, operations and procurement – need to be educated on the connection between working capital efficiency and generating free cash flow to reduce capital needs or fund business growth.

Centralising cash management

Another way in which treasury can drive working capital optimisation is by centralising cash management. “In a decentralised setup, subsidiaries tend to maintain high cash buffers, which in turn take the focus away from the need to reduce overall working capital levels,” says Mandhana. “Centralising cash across subsidiaries through pooling mechanisms, and transferring it back to the business as intercompany loans and deposits, not only helps in reducing overall cash needs but also drives business behaviour to optimise working capital utilisation.”

Institutionalising policy and practices

Mandhana adds that treasury plays a key role in institutionalising forecasting policy and practices across the organisation. “Effective implementation of the same has a direct impact on cash management and working capital optimisation,” he notes, adding that regular follow-up with subsidiary teams and the escalation of inaccurate forecasts can also help keep this process under control. Furthermore, Mandhana points out that treasury is assuming a leading role when it comes to arranging supply chain finance solutions for the business.

Getting it right

There is plenty that organisations can do to optimise their working capital – and, equally, there are a number of challenges that can arise, and pitfalls that may need to be avoided. After all, a project which fails to meet its original goals – or which sees staff reverting to old processes over time – is unlikely to deliver the fullest possible benefits of working capital optimisation.

“When we implement these programmes, they are perennial,” says Vrontamitis. “It isn’t a case of implementing the deal and then having service reviews every six months. You’re constantly on-boarding suppliers onto the programme – and, of course, the purchasing needs of the company will change over time.”

Focusing on the basics

For one thing, Vrontamitis advises that treasurers should avoid trying to run before they can walk. “My suggestion is to focus on getting the basics right,” he explains. “For example, if you are looking to increase payment terms from 30 to 60 days while adopting a payable financing programme, you first need to make sure that you have consistent processes in place for approving and paying invoices.”

Again, the need for robust processes extends beyond DPO. “Working capital improvements must be holistic across the order-to-cash cycle,” observes David Blair, an independent treasury consultant based in Singapore. Blair says that invoicing errors can represent a significant source of delays where accounts receivable is concerned. He also points out that it may be prudent for organisations to focus on the largest late payers who materially impact DSO in the first instance, rather than on smaller balances.

Collaborating on KPIs

Also important is making sure that companies are applying key performance indicators (KPIs) consistently across divisions where working capital is concerned. “In an integrated world, we are better when we are connected,” says BofAML’s Venkat. “Each division needs to work together in order to support working capital goals across the enterprise as a whole. For example, whether there is an opportunity to negotiate better terms on the payables side, or reduce inventory, or collect payment faster, these things all need to be centrally co-ordinated – and treasury should play a key role in making that happen.”

Organisational change

Meanwhile, Mandhana points out that optimising working capital may require broad organisational change. Whereas treasury and finance teams may exercise more direct control over sources of capital through debt raising and capital markets, he says that “responsibility for managing cash, payables, receivables and inventory is spread unevenly across operational silos such as treasury, finance, operations, supply chain, sales and procurement.”

The entire organisation therefore needs to pull in the same direction when improving working capital – and this requires effective change management. However, as Mandhana observes, “most companies do not have a formal organisational structure to manage such initiatives.”

Securing buy-in

Also important is the need to secure buy-in and engagement from multiple parties. “You can’t just set these programmes up and expect them to run,” says Vrontamitis. “When you look at using techniques like payables financing and pre-shipment financing, it’s really important for all the different stakeholders to buy into the programme. Treasury needs to sign up, and so does the bank – but you also need procurement on board, and you need the suppliers themselves on board and seeing value in the programme.”

Likewise, Mandhana notes the importance of ensuring C-suite attention. “Considering the cross-functional nature of working capital initiatives, it’s important that companies set the tone at the top, with C-suite executives emphasising the importance of this topic while also setting annual targets to free up cash flow,” he comments.

Achieving consistency

For companies operating in multiple countries, local variations may also need to be taken into account. Vrontamitis notes that the regulations in Asia vary from market to market, meaning that solutions that work in some markets may present challenges in others. “For example, the use of insurance is more difficult in places like India, because you can’t use insurance-backed financing in that market,” he says. “And we’ve seen similar moves in China and Korea. So while you can achieve a broadly consistent strategy around a receivables finance programme, you might find there are some idiosyncrasies when it comes to what is or isn’t allowed by local regulation.”

Technology and data

In addition, Mandhana points out the importance of leveraging technology and data. “Working capital optimisation requires visibility into various systems and tools capturing information on receivables, payables, inventory, suppliers and customer, business forecast and cash levels,” he says. As such, companies are changing the way in which they use technology: “Beyond the standard treasury and finance systems, corporates are starting to focus on data management and data visualisation tools that can provide them the required visibility and insights into working capital management.”

Further challenges

Aside from these issues, other obstacles can include a lack of visibility over key working capital metrics and processes, as well as challenges in getting non-finance people on board. Mandhana also says that the fear of harming customer or supplier relationships can slow down the process of payment term optimisation. “Instead of treating every customer or supplier the same way, companies need to take a more segmented and tailored approach to strike the right balance between price, service and cash flow,” he advises.


As companies become increasingly focused on the benefits of working capital optimisation, it’s clear that there is much treasurers can do to drive improvements in this area. From promoting a cash focused culture to centralising cash management, treasurers can play an important role in creating the conditions needed for working capital success. Key to achieving success in this area is overcoming the possible obstacles by putting consistent processes in place, applying clear KPIs and gaining buy-in from everyone involved – as well as making the best use of the technology and data available.

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