Optimising working capital: driving best practices

Proactive Strategies for Improvement

Companies can implement various strategies to improve working capital management, including:

• Gaining organisation-wide awareness
• Leveraging technology and automation
• Reviewing payment and collection terms
• Optimising inventory ratios
• Monitoring key performance indicators (KPIs)

Here are some best practices and strategies to consider:

Roles and Responsibilities

The treasury function typically leads working capital management and efficiency. Cooperation across Accounts Payable, Accounts Receivable, Credit Management, and Sales teams is essential to ensure alignment with the organisational strategy. This will help teams understand how their actions affect cash flows, and what they can do to improve it.

Technology and Automation

Technology also plays a pivotal role in enhancing working capital management by:

• Improving decision-making with real-time data
• Eliminating manual tasks through automation
• Expediting customer payments through digital collections and invoicing
• Optimising working capital with online validation workflows and electronic payment methods

Automation also helps treasurers forecast more accurately, allowing them to plan for future cash needs or surpluses. However, there is no one-size-fits-all solution. It is essential to consider industry-specific nuances, the model and complexity of the business, margins for negotiating terms with suppliers and customers, and the unpredictability of cash flows.

Procure to Pay: Payables Management

Procure to Pay refers to the purchasing process for goods and services that support a business’s activities, from purchase order to vendor payment. To optimise this, businesses should consider:

• When to Pay – striving to cover outgoing payments with incoming funds. Depending on negotiated terms, outgoing payments are often due before customer payments are received. Various strategies can address this by delaying supplier payments while still respecting agreed terms. These include using supplier financing for strategic spend and commercial procurement card programs for non-strategic spend.
• How to Pay – working towards minimising manual and paper-based processes. Instant payments, same-day ACH, virtual cards, and payment tracking for cross-border payments can help reduce costs, mitigate fraud risk, and increase efficiency.

Order to Cash: Receivables Management

Order to Cash covers all the steps involved in processing customer orders – from when an order is placed to when payments are received and applied. The goal is to quickly convert incoming customer payments into cash while minimising collection expenses and bad debt losses. Companies can optimise this by:

• Expanding payment options – allowing customers to pay in a way that’s convenient for them. This can drive greater usage of more efficient and cost-effective payment methods, such as cards, e-wallets, and other electronic rails.
• Improving cash application – enhancing the invoice matching process to reduce days sales outstanding (DSO). For example, virtual accounts can help identify incoming payments by customer or business, speeding up reconciliation.

Forecast to Fulfil: Inventory Management

Forecast to Fulfil involves planning, producing, and delivering products to customers based on demand forecasts. It is critical in managing both supplier relationships and customer demand. Companies dependent on material components might consider supplier diversification to minimise disruptions. Supply chain financing can also help companies pay suppliers promptly, strengthening relationships and mitigating counterparty risk.

Working Capital Management Benchmarking

Regular benchmarking and analysis allows companies to adapt to changing internal and external business dynamics. Key working capital performance indicators help gauge efficiency and identify areas of improvement. These include:

• Cash Conversion Cycle (CCC) – the time it takes to convert investments in materials and services into cash through customer sales. A shorter CCC indicates greater working capital management efficiency. A longer CCC however, could indicate issues in receivables, payments or inventory management, which warrants a deeper review to identify root causes.
• Days Payable Outstanding (DPO) – the average number of days it takes to pay bills and invoices. A higher DPO preserves working capital, but must be balanced with respecting supplier terms. A lower DPO, however, may reflect inefficiencies in invoicing and payables management, which should prompt a review of the consistency of payment terms, and efficiency of payment methods.
• Days Inventory Outstanding (DIO) – the average number of days inventory is held before selling. A higher DIO is not always indicative of inefficiencies, as these may be normal in certain industries due to seasonal buildups. However, these can sometimes reflect supply chain disruptions. This makes identifying DIO drivers in context of industry practices essential to achieving efficiency in this area.
• Days Sales Outstanding (DSO) – the average time to receive payment for sales. A high DSO suggests delays in receiving payments, impacting cash flow. This may sometimes result in businesses relying on external borrowing to meet outgoing payments, increasing cost pressures. Minimising DSO is therefore a key strategy in ensuring a company can better utilise internal capital to support their obligations.

Summary

Optimising working capital is a fundamental best practice that can free up capital for deployment across the company’s strategic initiatives. Understanding KPIs and identifying areas for improvement can significantly improve working capital efficiency, enhancing your company's overall financial health and resilience.

Co-Authors

Kevin McKeever, Head of Treasury Solutions Group, North America, Global Payments Solutions, HSBC

Kevin McKeever is the North America Head of Treasury Solutions Group for Global Payments Solutions at HSBC. Kevin is based in New York and has over 35 years of banking experience covering relationship management and cash management across sectors in the USA and Europe. In this current role, he provides consultancy to global corporates on domestic and international payments solutions, as well as training and advisory on current market trends across global liquidity and cash management. Kevin holds a MBA from the University of Warwick in the U.K., and is a Certified Treasury Professional under the Association for Financial Professionals (AFP).

Myriam Radi, Director, Liquidity Commercialisation & Treasury Solutions Group, Global Payments Solutions, HSBC

Myriam Radi is a member of the Treasury Solutions Group for Global Payments Solutions at HSBC, where she provides thought leadership to clients. Prior to pursuing a banking career, she spent more than 15 years in corporate treasury, where she served as the European treasurer for multinational companies across various industries.

Special thanks to:

Jonathan Denny
Chet Patel
Nigel Shaw