Working capital: opportunity knocks

How can companies tap the cheapest source of cash these days?

In its Global Working Capital Review 2013, consultancy firm and Vlerick Prime Foundation Partner PWC explores how companies can tap the cheapest source of cash in this post-crisis period, which might better be regarded as the “new normal”. Wouter De Maeseneire, Associate Professor in Corporate Finance, sheds light on the main findings.

“The current turbulent economic conditions are likely to remain for some time and with the limited availability of debt finance, the need to maintain low levels of working capital is becoming ever-more important.”

Wouter: “Especially in the current harsh economic climate, with reduced availability of bank credit and other funding sources, better management of the cash conversion cycle is key to economic success, in some cases even to corporate survival. It is particularly vital for growing companies or those facing financial constraints. Yet basically any company will benefit from reducing the amount of cash tied up in working capital items by critically reviewing its related policies. DSO (Days Sales Outstanding), DIO (Days Inventory Outstanding) and DPO (Days Payment Outstanding) should be KPIs that are thoroughly understood and closely monitored by all business managers.”

“During this period we have seen some businesses try to ride out the storm, relying on the goodwill of suppliers and lenders, whilst others have taken the opportunity to take decisive action to reduce their working capital. But how many have seen these actions as a long-term solution?”

Wouter: “Indeed, many companies don’t fully appreciate the massive relevance of rigorous working capital management. This leads to suboptimal operating performance, a worse liquidity position and greater reliance on external financing.”

“49% of company boards have a higher focus on cash and working capital than before.”

Wouter: “And rightly so: working capital is moving rapidly up the corporate agenda and companies should consider long-term strategies around it. Further globalisation and the sustained growth of emerging markets have produced an ever-more global supply chain, putting more pressure on working capital.”