Wherever a business is in its life cycle, whether it’s the fast early-growth phase, consolidation or riding out a flat market, working capital is always a priority. Smart companies know that managing their cash effectively can not only protect them in a downturn but underpin the business’s growth, not to mention foster better relationships with suppliers, customers and finance providers.

There are a number of factors that contribute to effective working capital management. Smart treasurers recognise that one size doesn’t necessarily fit all, but there some basic steps that can instill in a business a healthy respect for cash.

1. Create a cash culture

Brian Shanahan, founder of working capital consultancy Informita, says firms will see improvements in working capital once they’ve created a culture in the business where cash is valued and guarded by everyone. “Sales, procurement and treasury all have to be on the same page when it comes to cash,” he says.

Paul New, global new working capital champion at group treasury function at WPP, agrees. “It might be a struggle to get people to understand why cash is important, and what the implications are, but it’s key,” he says. “I often use the argument that at the end of the day we all expect to get paid our salaries on time, so if we’re not collecting cash, that’s at risk.”

It requires discipline to maintain standards and procedures, as well as good communication. “We push the message out all the time, and while we might score some wins, we have to keep going with it,” says New. “Some people need the carrot, and others need the stick to make sure they’re managing cash properly.”

Oliver Whiddett, head of group treasury at Tate & Lyle, adds: “I’m often surprised by how receptive some non-finance people are to discussing this. If a customer wants to discuss extended payment terms, someone in a sales role might not know what impact that’s going to have.

“So instead of simply pushing out payment terms I try to advise them on the pros and cons and the impact on the wider business. The challenge is how to talk about working capital to non-finance people. You need to emphasise why it’s important.”

It’s really encouraging to see more companies empowering their treasurers to take a lead on working capital. They’re more strategic now, and that journey is only just beginning

Oliver Whiddett, head of group treasury, Tate & Lyle

For some businesses a healthy cash culture can also be fostered with the use of targets and incentives that reward sales managers for securing favourable terms from customers.

2. Big up your treasury function

“It’s really encouraging to see more companies empowering their treasurers to take a lead on working capital,” says Whiddett. “They’re more strategic now, and that journey is only just beginning. So companies are missing a trick by keeping treasury as a reactive function.

“Working capital is a really interesting part of the business operations and it’s a great opportunity for finance staff to influence how well the business is run, so that makes it easier to attract the best people ”

The same applies to procurement and credit management – many of the best-performing companies achieve their results by empowering staff, offering incentives and promoting professional training.

3. Don’t get sucked into a terms war

“Sometimes you have to resist calls for extended payment terms. And we’re conscious that we should be competing on quality and not on payment terms,” says Whiddett.

Requests from major customers may make treasurers nervous – after all, keeping customers happy is a key business driver – but the savvy working-capital manager can push back.

“A lot of it comes down to the customer – how important are they to us? Is it essential to keeping them? It’s interesting how often those request for terms go away when you dig in. Customers may ask, and that’s fine, but if you dig in you can have great success – you can’t just keep giving away terms to every request. We can’t always pass that on to our own suppliers, so it has to stop somewhere.”

4. Know your customer

“Even if you think you know what your key customers and suppliers want, you may be surprised when you open up a dialogue,” says Andrew Griffiths, assistant treasurer at Anglian Water Services.

“We work with a lot of key suppliers to maintain the long-term condition of our assets so it’s important that they stay afloat and healthy in order to remain key parts of our operation,” Griffiths adds.

“And we found that although initially we were met with reluctance to take up our supply chain finance offer, as soon as we offered up some earlier payment, they jumped at the chance. So you never know exactly what suppliers and other partners need.”

5. Get your data right

Most enterprise resource planning (ERP) systems now produce reams of data that can help treasurers assess customer behaviour and credit risk.

Unfortunately, Brian Shanahan at Informita says few companies are making use of the data available. “As a result, it turns out that we see a lot of companies not making the right decisions because they’re basing risk decisions on out-of-date or incomplete data. And you don’t necessarily need a bespoke data analytics tool to do this. Just collect the right data in the right places and stay up to date on what your customers are doing because the devil is in the detail.”

There are a growing number of specially designed tools out there that businesses can use to get a better sense of customer behaviour. Phil Rice, head of credit at Aggregate Industries UK, is just one of the treasury leaders focusing on adding to the volume and relevance of his working-capital data. By collecting and analysing existing payment history data, Rice says Aggregate credit operatives are able to adjust terms accordingly to reward good behaviour and incentivise customers to pay on time.

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