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Managing working capital best practices

Managing working capital best practicesI'm seeking examples of best practices in managing working capital and would like to share across the proformative network case studies on success and failures. In this case, I am focused on examples of systems implementations or procedural and reporting changes which have increased visibility to and/or improved management of accounts receivable, accounts payable and inventory and led to better working capital management. Go tout your successes so that we can all learn from your achievements!

Answers

Topic Expert
Joseph Ori
Title: CEO
Company: Paramount Capital Corporation
(CEO, Paramount Capital Corporation) |

This is a difficult question to answer without more information on the company and industry. In general, managing WC involves reducing WC as much as possible to maintain appropriate liquidity while lowering the carrying costs of inventory and AR.

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Hi Brian,

Our library here at Proformative has two free white papers with some good info on this area:

Improving Working Capital Management and Cash Flow Intelligence

and...

CFO View of the State of Capital Planning Benchmark Study

Best... Sarah

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

An idea is to negotiate with a bank to have a long-term line revolving line of credit. That way when you need to advance a few dollars from the line of credit, cash will increase by the amount borrowed, thus increasing your working capital. The increase to the line of credit of credit will not adversely impact your working capital because the LOC is long-term. Always remember to renew the line of credit before it reaches less than 12 months until its maturity date. Companies doing this need a good, solid banking partner to accomplish this.

Another idea, if you have officer payables that seem to increase, rather than decreasing, turn it into a long-term note payable. Interest expense will increase, providing you are required to compute and pay interest, but it could help with working capital needs.

Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |

It is a tough question to answer without knowing your particular circumstances. I recall a former client company where having the inventory on the shelf and customer-ready for overnight shipping was critical to their business reputation ("you need it -- we have it"). Stockouts were really bad news. So they were always in danger of carrying way too much inventory and one had to balance the "we have it" reputation against huge excess inventory amounts.

But at its simplest level, I have never found working capital management to be as critical as other cash needs, business measures and investments -- e.g. long-term capital needs, marketing programs, margins, expansion, shareholder dividends, etc. As long as you have some kind of working capital line to fall back on, it should not be hard to monitor or avoid wasting too much WC money in today's rate environment. AP usually rises and falls along with AR/inventory fluctuations, so you get some compensating credit there, and inventory always seems to be the WC item that needs the most watching. Of course, a couple of painful bad AR balances can be the real killer -- more than the "cost of carrying AR" -- or buying bad inventory. I would monitory those situations carefully.

I usually implement all the usual WC measurement criteria (AR aging, days sales in AR, days COGS in AP, inventory turns, etc.) and report them monthly with agreed limit warning bells. But I don't sweat over fluctuations by month or even quarter -- I only look for upward/downward trends that are not correcting themselves in a reasonable time. Mid- and long-term cash flow forecasts are more important to me than overmanaging the WC area. We often hear that driving WC down is an important financial management concept, but if you spend too much time measuring and micro-managing that, one can lose sight of bigger business issues and the longer term view.

PS -- good point Chris on keeping the LOC long-term. I do that at a current client -- always renews 18 months or 2 years out.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I successfully grew a company 500%, and for most of that time had no working capital (deficit), but incredible cash flow (and no bank lines).

Maximizing cash flow (and hopefully building working capital) while growing your business is the key. Even if you have sufficient WC, one always needs to maximize cash flow; because that will decrease reliance on operating loans.

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