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working capital management wisdom needed

I consult for a number of firms. My biggest client has working  capital problems, which makes me nervous. I work with the CFO, who is s super nice guy but maybe not the best CFO in the world. I'd like to help improve the situation. Their problems are too many to list. What's your working  capital  management wisdom? Looking for anything that can help.

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

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.

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

Could we also add excessive OpEx to the list.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

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?

Ernie Humphrey CTP
Title: CEO & COO
Company: Treasury Careers
LinkedIn Profile
(CEO & COO, Treasury Careers) |

I developed a course on Proformative that could help as a foundation for effective working capital management, Working Capital Optimization: An Approach to Unlocking Enterprise Value, https://www.proformative.com/courses/working-capital-management-best-practices. As others ask, is it that it is misused/mismanaged or is it there not enough etc.?

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

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.

Joseph Anderson
Title: Consultant
Company: Private
(Consultant, Private) |

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/marketing initiatives that have done well in the past, technology upgrades that are past due and even timely payment of vendors.

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.

Bob Leonard
Title: President
Company: Strategic Business Services
(President, Strategic Business Services) |

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.

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

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.

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

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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