Working Capital Management

Managing working capital, the speed at which assets can convert into cash, has always been crucial to the financial health of companies. However, after the global financial crisis, the need for ongoing liquidity discipline and deep understanding of cash flow cycles has become even more vital, as access to affordable credit became a challenge.

Our perspective is that companies that effectively manage cash and liquidity create opportunities to prosper regardless of what is happening across the broader economic or industry landscape. While market trends change and customer preferences shift, one thing is immutable: cash is king. Companies primarily focused on accessing that financing externally, however, may be overlooking a large, hidden source of capital: their own balance sheets.

We work with clients across the entire working cycle spectrum with an objective of “freeing” cash, creating a cash management culture in the organization and improving the shareholders return. Accounts receivable, accounts payable and inventory are key components of working capital that companies can streamline to access cash trapped on their balance sheets.

Critical aspects of managing working capital under each of these components are listed below: 

Accounts Receivables Management

  • Understand criticality of the credit sales for the business model. Review and analyze the value of receivables compared to Balance Sheet size, revenue, profitability and liquidity condition of the organization
  • Formulate credit policy and receivable provisioning policy including a system of approval for credit limits with clearly defined authority
  • Credit limits should be set for each customer to reflect both the amount of credit available and credit period
  • Information for assessing creditworthiness may come from a variety of sources such as financial statements, bank references, trade references, competitors, published information, credit bureaus and online search
  • Special credit guidelines should be designed for large strategic customers
  • Consider credit terms extended to customers in competitive landscape
  • Formulate procedures for collections, escalations and default management
  • Design monitoring mechanism to ensure compliance with credit policy and procedures and receivables provisioning policy
  • Receivables reporting on KPIs related to credit control such as credit limit, credit period, days outstanding, collections performance, default history, concentration of credit risk, segmental analysis of receivables
  • Explore credit insurance considering its cost and information requirements
  • Periodic account reconciliations and balance confirmations from customers

Inventory Management

  • Analysis of the value of inventory and inventory holding period considering balance sheet size, revenue, profitability and liquidity position
  • Demand Planning aligned with market demand, vendors contracts and customers performance  
  • Supply Chain capabilities and IT systems to support the supply chain cycle
  • Policies and approval framework (procurement policy, provisioning, write-off)
  • Reporting capabilities for decision making support related to inventory management cycle
  • Inventory related KPIs to be included in monthly MIS (historical, budgeted and industry standards):
  1. Inventory days based on historical and forecasted sales
  2. Inventory as % of sales
  3. Inventory obsolescence and write offs as % of cost of goods sold and sales
  4. Categorization of inventory in non-moving, slow moving and active inventory
  5. Forecasted inventory levels based on order commitments with the vendors
  6. Concentration of procurement from different vendors
  • Periodic physical verification of inventory and reconciliation with financial records
  • Adequate banking facilities (funded and non-funded) to be in place at competitive pricing from a diverse portfolio of banks to finance the inventory levels
  • Regular feedback is essential for inventory management in a dynamic competitive environment from various functions relating to latest trends, competitive landscape, industry outlook, currency movement, financing options, performance of key customers, principals and vendors

Payables Management

  • Payables Management is critical to maintain and develop relationships with vendors (principals, key suppliers) and for brand image of the organization
  • IT systems should be able to facilitate vendor master and transactions management and provide periodic reports for review and analysis of payables
  •  Ensure compliance with procurement process, documents matching, payment guidelines and Delegation of Authority
  • Periodic account reconciliations and balance confirmations from vendors
  • Regular monitoring of Payables KPIs is essential for timely remedial actions:
  1. Number of Payables days
  2. Payables ageing
  3. Write back of old unclaimed Payables in line with approved policy
  4. Regular updates on disputed claims with action plan for resolution  
  5. Periodical review of credit facilities and credit terms with key suppliers
  6. Benchmarking of KPIs with competition and prior years