Strong working capital and liquidity management gives businesses a competitive edge. Right now, two factors are prompting treasury managers to revisit and enhance their working capital strategy: dynamic economic conditions and new technology resources.
At many firms, working capital levels remain at their highest point in a decade, which gives businesses more options.1 Instead of borrowing funds or deferring spending, companies with effective working capital can use excess cash to fund important projects, pay down debt, or invest strategically. These choices equip them to outpace the competition.
Dynamic conditions increasing cost of funds
Dynamic economic conditions underpin the importance of smart financial management during all cycles. Currently, businesses must contend with rising interest rates, inflation, a volatile stock market, continued supply chain disruptions, and the lingering affects of the COVID-19 pandemic.
Inflation and rising interest rates are of particular concern for treasurers and CFOs. Both decrease working capital efficiency. Inflation reduces the impact of funds, due to rising prices for goods and services. Higher interest rates make it more expensive to borrow money for growth, expansion, or day-to-day business needs.
Supply chain issues are also exacerbating the cash conversion cycle for many companies. Three critical metrics, Days Sales Outstanding (DSO), Days Payables Outstanding (DPO), and Days Inventory Outstanding (DIO), lengthened significantly during the pandemic and have yet to rebound to former levels.1
Digital innovations provide new options for working capital management
Despite these uncontrollable circumstances, treasury professionals have reason for optimism. New opportunities to leverage technology and outside expertise can help improve the visibility and decision-making that supports strong working capital management.
Banks, ERP providers, and fintechs have introduced a number of innovations that can make it easier to assess daily cash position, share information, and automate manual activities. Some of the most promising feature API links for near real-time access to data, and artificial intelligence (AI) for greater automation.
Leading banks like Wells Fargo are not only exploring their own solutions, but at the same time, collaborating with key solution providers. This synergy helps create embedded banking services that reduce technical complexity and streamline day-to-day operations. Instead of navigating between multiple platforms and portals, the goal is all-in-one access from a single, intuitive workflow.
Five steps to improve working capital
If you’re a treasury management professional, here are five ways to tap digital tools and subject matter experts to strengthen your working capital management right now:
- Revisit your strategy. Sound working capital management begins with a plan. If you have one, make sure it reflects a rising interest rate environment. If you don’t have this critical tool in place, gather company stakeholders to draft your working capital roadmap. Your bank can help you assess where inefficiencies and opportunities exist, and share best practices across similar companies and industries.
- Adopt digital tools. Eliminating manual processes and paper-based workflows makes an immediate, tangible impact on operational efficiency, which drives working capital success. Consider tools from your bank or other resources that can automate accounts receivable and accounts payable. Not only will important data be more easily accessible once it’s fully electronic, you’ll also have more time to capitalize on early pay discounts and other vehicles that use your funds wisely.
- Structure accounts appropriately. For larger organizations—particularly international companies—the hierarchy of your bank accounts will either enhance or limit your cash management options. For example, it’s difficult to concentrate cash for nightly investment sweeps, or move funds between countries or currencies, unless your accounts are structured correctly. Examine the levels where your organization makes decisions (such as headquarters versus lines of business) and how cash and data flow between entities. A clear structure makes it easy for the business to implement working capital decisions quickly and efficiently.
- Tap near real-time data. Instead of waiting for nightly batch files from your bank, or logging into various portals to check on transaction status, set up live data feeds that bring important data directly into your ERP or system of record. These API interfaces come as pre-built toolkits for fast implementation; there’s no need for tedious or expensive internal development or testing.
- Improve your cash positioning. The more you know early in the day about your excess cash, the more options you have to deploy it strategically. But gathering that information takes time and legwork. Digital tools can revolutionize the process by pulling data from multiple banks into consolidated dashboards, rather than manual spreadsheets. Speeding up data gathering can improve productivity so staff spend their valuable time on analysis and recommendations rather than hunting for details.
Good working capital management never goes out of style, so enhancements like these will support your efforts now and in the future.
1 J.P. Morgan, “J.P. Morgan Working Capital Index 2021,” 2021
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