Why cashflow management and working capital deserve more attention

Companies that focus on external financing may lose sight of an important source of capital: their own balance sheets.

The recent CFO Barometer measured the maturity of cashflow and trade working capital management among Flemish companies. Mark Sheikh, M&A Associate partner at EY, Dries Telen, Strategy and Transactions senior manager at EY and Jean Gieskens, lecturer at numerous Dutch universities and business schools discuss the results of the CFO Barometer.

How do you optimize working capital management?

Dries Telen: “When talking about optimizing working capital management, we have three things to take into account: customers, distributors and inventory. The task is to find a balance between them by making sure that customers pay more quickly, ensuring that incoming invoices are not paid too quickly and guaranteeing that the inventory is sent out as soon as possible. That is not an easy balance to keep in its own right. But that task is even more difficult when you have to try and maintain good relationships with customers and distributors. This focus on maintaining good relationships has become more important than ever before.”

How should CFOs monitor the cash position?

Dries Telen: “Many CFOs have started to follow up the cash position more frequently. A good forecast is essential to know where a cash shortage might arise. A CFO can only negotiate with a bank to solve a shortage when he or she has gained the necessary insights in advance. Especially with companies where the cash conversion cycle is relatively long.”

Mark Sheikh: “The cash swing, the highest and lowest cash position during a certain period, is important to monitor as well.”

Jean Gieskens: “And it is also vital to solve dead working capital, like inventory that remains in-house for too long and invoices that remain unpaid. The shorter the cash conversion cycle, the better. Naturally, this is not possible for all companies, but in some sectors, it should be possible to significantly shorten or negate the cycle by aligning processes and flows better.”

Jean Gieskens: “And CFOs need to monitor the inventory better as well. The results show that almost half of the respondents assess the inventory on a monthly basis, and 12% do it even less frequently. It might be interesting to make a matrix of the inventory by organizing its content according to its position in the production process (raw materials, goods in transit, half-finished products,…) and according to the type of inventory (luxury goods, beverages, consumables,...). That way you can more easily identify problem areas and monitor your inventory more frequently at the same time.”

How are companies financing the working capital?

The need to finance the working capital fluctuates strongly between respondents. The survey shows that they rely mostly on in-house means and straight loans.

Mark Sheikh: “Factoring is a good method. Yet we see that it is not used much. Only 22% of respondents say they use alternative financing methods, like supply chain finance or (reverse) factoring.”

Do companies create enough working capital awareness?

Mark Sheikh: “67% of respondents have a working capital strategy, but almost 60% have no policies to share this strategy with the rest of the company. And only 42% have working capital targets. This is a missed opportunity. The people that communicate with customers and distributors and the people that manage the inventory (essentially sales, procurement and production), have to be very aware of the company’s working capital strategy and the policies and targets that concern it.” 

Mark Sheikh: “The best way to create awareness around working capital in a company, is to define and follow up a few clear-cut KPIs. The most obvious are DSO, DPO and DIO, but also OCF and FCF can be interesting. These KPIs should be monitored weekly or biweekly. Communication towards stakeholders is also essential. It is unfortunate that these KPIs receive so little attention. There is a lot of talk about turnovers, EBITDA and bonuses, but working capital does not get the attention it deserves.”