Managing working capital to set the stage for recovery

The right resources and tools can help optimize liquidity

5 minute read


Key takeaways

  • A multi — pronged approach to working capital management can help to preserve and enhance liquidity
  • Improving cash flow forecasting, adjusting payment and collection practices, using the right treasury solutions, and leveraging digital are critical
  • By optimizing cash flow, you can enable your company to capitalize on opportunities


Recent economic volatility has revealed the degree to which even well — capitalized companies are vulnerable to unanticipated shocks. The good news, however, is that weathering this storm is well within the reach of many companies. “The real challenge and opportunity is having enough liquidity at the ready to be able to respond as conditions change,” says Harry Curtis, Business Banking Treasury Sales Executive at Bank of America.


The key to safeguarding your liquidity is leveraging the right resources and digital tools, and to identify and mitigate the risks threatening your working capital position. This might entail having your sales team work with finance to assess the cash position of your top 20 customers, or having more frequent conversations with your financial institution about the latest cash management solutions. “If businesses can do those basic tasks and leverage these relationships extremely well, all the other things fall into place,” says Curtis.


As you plan for a post — pandemic recovery, here are four critical strategies to consider.


1. Conduct more cash flow analysis using cross — functional teams


In the months ahead, businesses can expect ongoing uncertainty to potentially impact cash flow and working capital management. For instance, a manufacturer that has already tackled most of its pandemic — related supply chain challenges may encounter unexpected obstacles tied to potential new trade policies that impact its sales. “Don’t take for granted historical patterns that may not materialize in a year in which there’s been so much disruption,” says Curtis.


Not only should you monitor cash flow more frequently than in the past, but you should also share this information across your organizational silos through more coordinated communication. What insights can the sales team provide? Are there new customers in the pipeline or unexpected opportunities to end discounts with existing customers who aren’t likely to leave if you do. Sharing such information is vital to forecasting accurately and proactively planning for fluctuations in working capital.


Optimize Working Capital

Protecting your working capital position in essential in uncertain times. More than 48% of executives are managing their working capital more frequently since the coronavirus, according to a recent Deloitte poll.


Here are some Key Steps:

Keep forecasts current

Adjust your predictions frequently to account for fast-changing market conditions.


Analyze delays in account receivables

The right technology can help you get a handle on where to direct your collections efforts


Look for ways to optimize liquidity

Negotiate earlier payments from customers and better payment terms with suppliers


Manage inventory wisely

Make the most of tools to help you track inventory levels and adjust them to current conditions


Re-examine your financing methods

Reserve your line of credit for short-term needs and speak with your banker about options to finance long-term purchase such as machinery and real estate


Source: Working Capital Management, Deloitte July 2020

2. Adjust your payment and collection practices


To avoid a potential liquidity crunch, ask A/P to pull together a list of the most strategically important vendors and examine the payment terms in place. Is your company on good terms with these vendors? Is there room for negotiation? Perhaps they can temporarily adjust your payment terms. Rather than 60 — day terms, for instance, they might be willing to accept net 90 or net 120 with a 10% deposit. Your banker may be able to help as well. They could tell you whether any of your vendors are accepting credit card payments. Alternatively, they might identify new vendors that accept credit cards that weren’t on your radar previously.


“Card payments save your vendors considerable effort and time in back — office processing while instilling a greater sense of confidence that they’re getting a payment that won’t bounce,” says Curtis. Meanwhile, your company gets to enjoy a 30 — 45 — day float until the card payment is due.

“Don’t take for granted historical patterns that may not materialize in a year in which there’s been so much disruption.”


When it comes to A/R, accepting electronic payments from your customers is an absolute boost to your working capital position. In those instances when accepting a check is the only option, however, consider depositing them using your bank’s mobile app to speed the flow of cash into your account.


Supply chain financing is also growing in popularity, as solutions such as “reverse factoring” allow buyers and sellers to accept more favorable payment terms. More specifically, buyers get to extend payment terms while sellers collect payments quicker, with a financial institution serving as the intermediary.


3. Improve bank account and cash flow management


It’s not unheard of for a company to do business and hold deposit balances with several banks. This may impede clear oversight due to decentralized bank accounts and reporting, excessive account documentation. Additional complexities and inefficiencies can arise from highly manual payments and receipts processing.


This is exactly why treasurers must engage their bankers to review their company’s bank account structure and learn about new digital solutions that can close potential gaps and reduce inefficiencies. “Companies need to ensure they’re leveraging the right cash management solutions to help optimize working capital and understand their liquidity,” says Linda Chan, Senior Treasury Management Officer at Bank of America.


Your bank likely has a wealth of tools that you can leverage to better anticipate trends that could affect your cash flow. These may include mobile apps to help you keep tabs on your cash flow balances and working capital position using a smartphone, and online reporting and forecasting tools.


For accounts payable, consider making more payments electronically, rather than by check, as well as solutions that will allow you to automate the cataloging of invoices for better analysis. You may be able to create further efficiencies by integrating your accounting or ERP system with bank applications.


4. Optimize the technology you already have


Many companies may not be in a position to purchase new IT systems. However, there’s no denying that technology is essential to effective working capital management.


To bridge this gap, proactively look for opportunities to work more closely with IT. This new partnership will provide a holistic view of the company’s IT systems and better equip the organization to identify productivity — killers that can be fixed using your existing resources. Automating outdated A/P tasks and A/R or streamlining enterprise resource planning (ERP) could liberate teams to focus their energy on higher — value tasks.


Of course, implementing critical technology should always be an option. But before committing to the additional capital expenditure, enlist a cross — functional team to examine and exhaust all of your internal IT solutions.


Harry Curtis | Business Banking Treasury Sales Executive, Bank of America

Linda Chan | Treasury Management Officer, Bank of America