How Mid-Market CEOs can Free up More Cash with Better Working Capital Management Practices

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While most mid-market companies understand the basics of optimizing their working capital, many still leave cash on the table.

GettyImages-sb10064290g-001-compressorWhile most mid-market companies understand the basics of optimizing their working capital, many still leave cash on the table. A research report by the National Center for the Middle Market said even minor improvements in working capital management can free up millions of dollars for many mid-market companies.

Mid-markets should take an example from top performers. While 24% of all mid-market companies say working capital management is the top business priority, 37% of the fastest-growing businesses put it above all else. They tend to have more meetings, more awareness and more organization-wide policies that support working capital management.

Here are 3 things mid-market companies can do to improve their working capital management.

1. Create a cash culture. NCMM said mid-market companies should establish a strong “cash culture.” In the organizations with the highest growth rates, leaders meet more frequently (often weekly) to discuss cash management. Mid-markets should ensure their staff understand how freeing up cash enables everyone to meet their KPIs more effectively and how that can translate into a better work experience with better job security.

“To maintain a focus on working capital management improvements, leaders need first to make sure that all employees, including both financial and operations people, understand what working capital management is and how their actions influence it.

Companies should assign specific responsibilities associated with working capital management and empower employees to reach those goals. Certainly, this means companies will have to be more open in sharing some financial information and statements with operations, financial, purchasing and other staff members.

“To maintain a focus on working capital management improvements, leaders need first to make sure that all employees, including both financial and operations people, understand what working capital management is and how their actions influence it,” said the report.

2. Measure your working capital management performance. Only half of surveyed companies said they use benchmarks to measure their working capital management success. Mid-market companies need to measure performance against their peers through KPIs such as sales, debt-to-equity ratio, operating cash flow, accounts receivable turnover, accounts payable turnover and inventory turnover. Businesses can start by comparing their numbers to those found in the NCMM reported for publicly traded mid-market companies. “Even if you believe your organization is performing well in this area, seeing how your business compares to others in your industry is always insightful,” the report stated.

Matt Clark, chief operating officer for Corecentric, said that while optimizing working capital management was once “almost exclusively a Fortune 500 capability,” companies have many software solutions that can measure and track KPIs. He said implementing financial process automation in the accounts payable and receivable functions can boost efficiencies and reduce costs.

“And with the full visibility these solutions provide, C-suite executives will have all the data they need to make more strategic business decisions based on an accurate accounting of their working capital,” said Clark.

3. Establish working capital management policies and procedures. Mid-market companies should establish written goals and create well-defined policies around receivables, inventory management and payables. NCMM noted that few companies surveyed took a strategic view of payables discounts by actively measuring the value of the discounts compared to the cost of their own capital. They also may want to consider moving away from early pay discounts, or negotiating higher volumes and more business in exchange for extending a customer’s payment terms.

Ryan Davies, associate principal at McKinsey & Company, said that by analyzing spending with suppliers, mid-markets may be able to reduce erroneous decisions and tighten their spending. In one example, he said procurement managers at a company underestimated by as much as 90% how much they were spending with some suppliers, missing an opportunity to negotiate better volume discounts and payment terms.

Managers can recreate business processes with a “clean sheet” approach, then compare it to benchmarks to test inventory assumptions. In one example, he said a company was able to cut inventory supply from 50 to 30 days. “The 20-day gap between the incremental target and the clean-sheet target was worth tens of millions of dollars annually,” said Davies.


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