Companies that make working capital efficiency part of their organization’s culture have the opportunity to generate more of their capital internally, thereby lowering costs, improving their performance and boosting their competitive position.
When outside capital is needed, good cash flow and working capital management will make it easier to find and less expensive, no matter what the economic cycle.
Smart Business spoke with Joe Rockey, executive vice president, Commercial Banking for PNC, about how attitudes toward working capital have changed and what steps companies can take to improve their performance.
What impact does the current economic climate have on working capital strategies?
Faced with uncertainty around tax law and health care changes, as well as a slowing economic recovery, 400 financial decision-makers told us in a recent survey that they are still ‘hunkered down.’ The strategies they deployed to deal with the financial crisis have become the new normal.
And one of these strategies is to make working capital work much harder.
Even the best companies can do better. And they know it. Ninety-five percent of the financial leaders in the survey said that there is room for improvement in their company’s working capital efficiency.
What steps can companies take to improve working capital performance?
The key is not to treat the pursuit of working capital efficiency as a limited project that ends at implementation but to realize that implementation is just the beginning of an ongoing process.
The first step is to establish best-in-class performance goals around central issues, such as the length of your cash conversion cycle, and develop metrics that measure actual performance against the desired outcome. Continuously monitor performance against your goals and analyze gaps to determine their root causes.
Then, develop and execute detailed action plans to address and remedy performance shortfalls and uncover additional metrics or measures that should be tracked.