Why Manufacturers Need a ‘Working Capital’ Strategy to Grow

A recent survey reveals that while manufacturing executives say working capital is extremely important to their operations, more than half of these companies have not implemented a working capital strategy.

Accounting and consulting firm Crowe Horwath, LLP, surveyed manufacturing executives about working capital management and best practices. Thirty-two percent of those surveyed said optimizing working capital was “extremely important”, while another 50% said it was “very important.” Almost 90% of executives surveyed said that improved working capital management would boost their company’s profit margin, but despite these findings, more than half of companies did not have a working capital strategy.

Crowe Horwath principal Bart Kelly said in the report that management of working capital requires ongoing awareness and consistent, standardized practices throughout the organization. “That can only happen if senior leaders identify working capital management as a core objective. Developing and implementing a strategic plan to optimize working capital is the first step in demonstrating that,” said Kelly.

Nearly half of manufacturing executives said in the survey that external factors were influencing their ability to manage cash flow. Yet roughly a third said there also were internal factors, including their cash management. These factors included things like inaccurate sales and operational planning, long supply chain lead times, a lack of business analytics, and delinquent receivables. Researchers said that inventory management is a significant missed opportunity for them to realize the power that internal functions have over cash management.

A Deloitte report about optimizing cash management recommends companies strive to build a “cash management culture” that focuses on budgeting, forecasting and financing, and indicates how to handle day-to-day activities with cash management in mind. Deloitte also says that cash flow is not just a finance issue, but an operational issue, as well. The Deloitte report said that senior management must go beyond prioritizing cash flows in an effort to free up cash. It also means encouraging financial and cash flow discipline in both good and more difficult economic times. “All departments—from sales and marketing, procurement and production to finance and treasury—must coordinate for optimal results,” the report said.

Meanwhile, companies that optimize their cash management strategies can strengthen their balance sheets, improve financial stability, and lead to a competitive edge with greater profitability. And Kelly cautioned in a statement that manufacturers are missing a big opportunity to realize the power internal functions can have on cash management. For example, he said companies aren’t taking full advantage of their ERP systems to generate data. That data could reveal “specific, actionable opportunities that could result in marked improvements to their balance sheet and bottom line.”

“We found that financial losses for the manufacturing and distribution companies are twofold, but mutually exclusive,” said Kelly.