Optimising Working Capital through Treasury Fundamentals

In minimizing the impact of disruptions treasury plays a crucial role and can set up its organization for success.

FREMONT, CA: Organisations must plan wisely and maximise working capital in the face of geopolitical unpredictability and economic turbulence. Businesses that can quickly adjust to changes in credit prices, consumer spending, and consumer behaviour frequently profit from new opportunities and can bounce back from disruptions more quickly.

Firms may experience difficulties with cash flow if the economy slows down, for instance:

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• Reduced customer demand to clear off excess inventory

• Difficulties collecting accounts receivable, which may have an impact on liquidity and working capital

• Threats to financial flow and deposits from cyberspace

Managing Operations and Inventory

To optimise working capital, treasury can work with sales and operations in multiple areas, including:

• Supply Chain Manages Risk and Unlocks Value

Treasury teams can assess risks by running simulations that depict how disruptive events will affect key suppliers and clients. By utilising its credit profile, a company can enable supply chain funding for its counterparties. Treasury can then work to lessen the risk associated with accounts receivable and enhance commercial ties.

• Inventory Levels for Stock and Work in Progress

Several companies experience supply shortages, which results in decreased sales. By collaborating with the company to determine inventory levels, supply chain management can be improved, keeping the supply's competitive edge and balancing working capital retained as inventory. The cost of keeping this inventory could be difficult during a recession. Inventory purchases might need to be revalued in the face of excessive inflation. The speed at which inventory can be turned into cash may also be impacted by decreased demand, which might put a strain on estimates and increase reliance on potentially expensive external finance.

• Sales and Purchasing Relationships

Through negotiated sales conditions and indicators related to days' sales outstanding, treasury can collaborate with sales to deliver insights that can help optimise the enterprise sales value. Similarly, a working connection with purchasing can influence metrics for days payable outstanding and assist in maximising the value of cash through negotiated purchase conditions. 

Scrutinising External Funding

Using a disciplined two-part approach that examines the organisation’s funding and needs, the treasury can further maximize liquidity and working capital efficiency.

• Ensuring Counterparties Meet the Organisation’s Funding Needs

This could entail choosing the best banks to partner with based on the services and goods the company needs. The Treasury may also reassess national risk and review local subsidiary funding agreements because some governments experiencing financial constraints might give local organisations a priority.

• Carefully Review the Organisation’s Current External Funding Sources

If current arrangements do not offer enough funds for future requirements, for example, the Treasury Department may act immediately to extend existing lines to avoid delays. To give access to liquidity in case of necessity, numerous organisations across all market categories may choose to expand their current lines or establish auxiliary facilities. If credit lines are not required, Treasury may be able to unlock value by lowering the costs associated with unused or superfluous credit lines.

Navigating Rising Interest Rates

Organisations that have raised their inventories, directly or indirectly, might not want to rely on external credit and its increased costs. If consumer demand declines, having access to finance could be crucial.

Freeing up Internal Liquidity

Organisations can benefit by acquiring access to their funds as much as possible rather than taking on external debt as this cost of credit rises. If the business follows this course, the Treasury might:

• Consider using internal or intercompany finance sources while looking for potential internal sources for previously locked cash.

• Increase cash access through cross-border pooling, research the options for accessing jurisdictionally trapped cash, and examine intercompany netting. Tax and legal teams can assist in explaining the ramifications of any structures and financial transfers involving many jurisdictions and legal entities.

• Conduct a rationalisation process to reduce the number of accounts and counterparties. Simplifying account structures and consolidating counterparties can be an important first step in putting any cash structure in place.

If the scope is more complex, many organisations may seek to improve efficiency by establishing an in-house bank.

Getting a Clear View of Organisational Liquidity

It is better if the treasury has clear visibility. The Treasury should have complete access to information on the organisation's bank accounts, cash balances, cash flows, and funding requirements by region and legal entity. The Treasury can ensure the company has adequate cash on hand to satisfy its operating needs if it has complete insight.

Many treasury teams do not have this real-time access to all financial data. This has an influence on their capacity to carry out their commitments successfully, guarantee account financing efficiency, and use cash to its best advantage.

However, these teams can increase visibility by working within the organisation to promote the prominence of cash visibility. Implementing technology with improved communication and data aggregation capabilities, using a well-defined cash positioning and forecasting strategy and delivering it to management in an understandable fashion.

Instilling a Cash Mentality

Focusing on the fundamentals, treasury management is crucial to maintaining operations and solid cash management practices. Treasury teams should do the following to determine the enterprise's present needs and develop a long-term operations strategy:

• Collaborate with banks, consultants, and specialists to find potential for liquidity generation and new processes that can improve long-term financial performance. Treasury, for example, can collaborate with banking to boost automation in receivables reconciliation and reduce time in cash application.

• Implement and track metrics throughout the organisation to encourage change and assess company performance. If a company wishes to improve its liquidity, it could compare particular key performance indicators (KPIs) to accounts receivable to collect receipts faster and better manage consumer credit.

• Work with the company to inculcate a cash-flow mindset and make sure working capital plans match the organisation's present and future needs as well as the economic cycle's dynamics.

Organisations can optimise liquidity needs and working capital to minimise the impact of unexpected disruptions with careful planning, strong relationships and focus on core fundamentals.