I consult for a number of firms. My biggest client has working capital problems, which makes me nervous. I work with the
working capital management wisdom needed
Answers
What kind of wisdom do you need? Generally, there are three ways to deal with working capital issues....
1. Get more working capital (to include temp or bridge capital)
2. Prioritize working capital needs based on what's available.
3. Analyze need and maybe reduce the need.
But it all depends on the business plan. Focus on the solution/s not the problem.
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Could we also add excessive OpEx to the list.
Joseph-what exactly do you mean by "working capital problems?"
I think solutions (wisdom) would come after an analysis of the root cause(s) of the "problems...
e.g.
-overbuying inventory - purchases not tied to demand
-poor AR collections - terms too lenient
-customer dissatisfaction-won't pay because they are disputing quality or price or timeliness of delivery/work done
-other reasons (maybe undercapitalized??)
Do you or the CFO know the root causes?
I developed
Negotiate new terms with vendors who they have a good relationship with. If terms are 30 days, maybe the terms can be extended to 45 or 60. The impact could be less interest being charged for the use of the line of credit. Interest for using the line of credit (provided they have one) can be reduced by increasing payment terms for AP and decreasing payment terms from customers.
If they have vendors that offer rebates have them negotiate getting rebates. Recently the construction company where I work successfully negotiated rebate programs with suppliers that didn't offer them to us before. The result has been favorable.
Hello Gentlemen,
Thank you all for the thoughtful advice and referral to that course.
What I see going on, which is not a real insider's view, is that the company is short of working capital to take advantage of normal opportunities... sales/
I believe the business my friend has helped grow is profitable, growing and has a good future, if things like this don't get out of hand.
I think the CEO and my friend often see things differently, which I believe to be the crux of the problem. Another course that might be handy would be something about how a CFO can persuade or more effectively affect the actions of a free-wheeling CEO. To Wayne's point, I think a fair amount of cash-consuming excess overhead has been accumulated, contrary to the financial advice available to the CEO.
In any case, thoughts on how to improve the working capital situation that my friend can implement without too much CEO agreement are greatly appreciated.
Of course, that's just my take on it.
Getting a clear understanding of the metrics used to measure working capital performance is critical. Regular reporting on these metrics and alignment on the goals for each metric will help get everyone aligned and should drive common action plans. If you need any help on this just let me know. I have been through this with multiple CFOs.
I would suggest you prepare a five year ratio analysis to show to the CEO/CFO which will identify their problems with WC. You can show five ratios, Inventory Turnover, Days Inventory, AR Turnover, Days AR and most important the Cash Conversion Cycle. The ratios can then be compared to industry averages.
If the CCC ratio is high, this reveals that the company is carrying too much AR and Inv and the company's short term debt costs times the dollar CCC equals the cost of carrying the company's working capital.
Typically if the company has effective communications, and is running smoothly, it would leverage it's receivables as a way to free up cash flow to place new orders for supplies due to the increase in purchase orders.
But it seems you are asking for steps you might pass on to the CFO to help deal with a CEO who has mismanagement issues. Help might come more from a psychiatrist than a spreadsheet unfortunately. CXO personality disorder is a topic alive here at Proformative on various posts and threads.
Tough choices......
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Cash Management