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Managing Your Working Capital

How can I get more cash to manage my business (without borrowing)? With the proper management of working capital.

With over 30 years of experience in the industry, Jeff Skoog, Director of Treasury Management Services has a few tips.

How would you advise a company’s CFO or business owner to make the most of their working capital?
There’s a big difference between a corporate CFO and a business owner of a smaller company. Most CFOs should be fairly comfortable with the concept of working capital management – every day they have to forecast cash flow to make business decisions. The whole idea around working capital management is to release cash or liquidity. Once unleashed, cash is available for anything, such as paying down debt, making capital improvements, paying dividends, etc.

What financial advice would you give to a small business owner?
Understand the Cash Conversion Cycle and how it directly impacts your operations. It holds the key to unlocking working capital. Study your balance sheet and income statement and focus on turnover ratios.

How quick are you getting cash in for things that you’re selling? It’s important to understand: Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO). The Cash Conversion Cycle is DIO (the number of days your company is going to hold onto its inventory before it gets sold) plus DSO (the number of days it takes to collect cash from sales) minus DPO (number of days from the time you procure your materials to when you make payments to your suppliers). Once you understand that, the better equipped you are to make decisions that will make you more efficient.

Smaller companies must be more vigilant. Some smaller companies may think that the quicker they grow, the more successful they’ll be. What some of them find out is: if they grow too fast, the more cash-strapped they are. And then what happens? Then they can’t make payroll or pay suppliers. As they grow, they will want to be on guard to maintain liquidity or they’ll end up in a position where they will need to infuse more cash from outside sources. This means they need to pay strict attention to debt collection, constantly monitor inventory levels, stretch out payments to suppliers, and tighten up on other aspects of the balance sheet.

Why would a company need more or less working capital?
Working capital is your cheapest source of cash. Think about it. If you have excess inventory on your balance sheet, you have unnecessarily tied up too much cash there. If your receivables have been rising significantly, that’s where your cash is: it’s sitting on your balance sheet as an asset that’s not liquid. The sooner you can collect those receivables, the sooner you’ll have the cash to deploy elsewhere. It’s important if a company wishes to expand or grow to have liquidity. They might need less if revenue is stable or declining. 

What are some of best practices to optimize cash flow?
Benchmarking is always a best practice. It’s important to know that you are not operating in a vacuum. Benchmarking gives you a clear strategy and a roadmap. It allows you to look at your peers in the industry to make sure you aren’t lagging behind.

You might want to adopt a “best in class” strategy. Basically, look at what others are doing, imagine their best possible scenario, and set your sights on reaching it. Or you can benchmark against your company’s earlier years when your ratios may have been better and then try to replicate those levels again. Maybe you were more efficient in earlier years, maybe your turnover ratios were better. When you benchmark, you’re going to put your business in a better position. 

A purchasing card is also an excellent tool around working capital management and cash flow optimization. If you’re using a purchasing card, you’re able to extend your DPO by 20 or more days. It’s an easy practice to adopt. Your bank will work with you in discussing it with your suppliers. Finally, every business should have a line of credit available to get through periods when inventory and receivables are necessarily higher.

How does technology play a role?
It’s vital. Many financial payable, receivable or operational procedures are automated. It’s easier and it will save you time, which equates to money –  e.g. lockbox payments, straight-through posting of accounts receivable entries, and invoice automation procedures (which remove a lot of paper handling in the matching of purchase orders to invoices and shipping documents.) Technology can also play a role in helping you establish dashboards that give you analytic information to help you make better decisions such as managing early pay discounts with your suppliers. Consider setting up automated self-servicing portals and end-to-end processing with your suppliers – to pay or collect bills – or to allow your customers to know about orders, ship dates, etc.

What is on the horizon that CFOs and business owners should keep tabs on as digitization continues?  
Mainly, fraud. We see it on a regular basis. Hackers are trying to replicate credentials, steal data, etc. They are very sophisticated and very patient. There are bank services that are available to help at the bank account level, but owners have more power to prevent these attacks than they realize.

Business owners must make it a point to be educated on how the criminal element is attacking them in order to facilitate a security breach which would allow access to their assets. The business owner has as much or more ability to thwart crimes as do the banks and they would be wise to educate their staff as well.

We’ve been building our Treasury Services team over two years. What are our greatest strengths in the marketplace?
Our team understands our clients and their back office processes. We know what is involved in collecting receipts and paying suppliers and how this impacts the Cash Conversion Cycle. We consider this one of our strengths. We’re a regional bank that offers a more personalized experience and we also possess a higher level of financial acumen and understanding of the actual operations of a business.

Our Treasury Management team comprehends working capital management. We are able to advise clients on appropriate solutions to their daily operational needs so that, over time, they are able to grow and prosper.

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