The current financial meltdown and credit crunch have aggravated the liquidity position of most companies
By adopting the new good practices in working capital management followed by successful corporates, other firms too will be able release more cash from their operations
Till very recently, the problem of ‘empty cash box’ used to be voiced only by start-ups or companies on the brink of bankruptcy. However, the financial meltdown and credit crunch have left many mighty corporations too struggling to sustain their liquidity positions.
With external financing becoming unavailable or highly expensive under the current environment, focus of all companies is on generation of internal cash flows so that they can support their day-to-day operations, and luck permitting, invest for future growth. Corporate treasurers are, hence, under pressure for more effective working capital management (WCM).
Constraints in improving WCM
Unfortunately, many firms are not fully aware of how exactly they can improve their WCM processes. In a recent online survey of treasury executives, 71 percent of the respondents admitted that their companies’ capabilities are not adequate in the areas of cash flow forecasting and improving working capital (WC). The following are the major constraints:
While attempting to improve WC processes, some firms focus only on a specific component of WC, like receivables, payables, inventory management or incentive compensation links. Very few embark on more comprehensive process improvement initiatives.
Similarly, several companies rush to adopt brutal short-term initiatives to free up cash, by pressurising customers to pay earlier or delaying payments to suppliers unduly, or pruning inventory levels drastically. Such attempts, besides yielding only marginal improvements, may hurt the long-term interests of organisations.
In contrast, the practices now adopted by some successful...