New Strategies for Unlocking Working Capital

In this time of rising interest rates, unlocking working capital is becoming an increasingly valuable way to self-fund your operations without incurring higher borrowing costs. To confront today’s market and economic realities, however, treasurers will have to move beyond traditional methods and explore more advanced techniques that have emerged.

Freeing up capital isn’t just a rainy-day strategy. Discipline around working capital will also help your organization when conditions improve. Not only opportunities like mergers and acquisitions, dividend distributions, share repurchases, and research and development investments. It can also help you find ways to reduce the use and frequency of your high-cost revolver loans, which are always top of mind among corporate treasurers as a way to increase shareholder value. Especially in a cost-prohibitive environment, it’s essential for business leaders to continue to optimize cash flow to meet their short- and long-term needs.

Unlocking capital from your value chain requires planning and coordination. You’ll need to determine the best areas to extract capital flows and decide where to deploy it to get the best return. That, too, could require a new approach. Ultimately, unlocking working capital isn’t just a numbers exercise; it’s a strategy exercise.

Strategic Alignment

Truly understanding the capital opportunity is not just a matter of quantitatively analyzing your balance sheet, it's a matter of qualitatively understanding where the company is trying to go. When undertaking this task, ask yourself: What are the short- and long-term plans that the CEO has communicated? Are your treasury processes aligned with those larger objectives?

Part of maintaining a holistic view of your operations and goals means not cutting costs in an area that’s a priority for the organization. If the CEO is focused on innovation, for example, you probably don’t want to cut the technology budget.

When you look at working capital as a strategy exercise, you’re examining all aspects of the organization to discover what the priorities are, where the opportunities are and where the potential pitfalls lie. From there, you can get a clearer picture of where you can unlock capital that doesn’t involve borrowing at high rates.

Begin With the Balance Sheet

A good starting point is to perform a balance sheet checkup. This provides you with the opportunity to review your working capital metrics and make sure they’re properly optimized, including whether you’re benchmarking your numbers against your industry peers.

From there, you can start examining the areas and processes of your organization that connect to accounts payable and accounts receivable. For AP, processes such as invoice receipt and approval, payment terms, payment types, and procurement policies. For AR, processes such as invoice creation and issuance, invoice payment terms, and collections. Think of all of the elements on your balance sheet as a funnel: starting at the highest level and working your way down to the specifics allows you to understand the key categories you need to focus on.

Once you have a more granular understanding of where you can unlock working capital from the various line items on your balance sheet, it’s a good idea to get a second opinion about how to proceed. Consulting firms are often the typical option, but they’re expensive and require a learning curve to understand the ins and outs of your operation. Instead, you can look to leverage the trusted advisers that you already work with, whether it’s your accountant, industry associations, your supplier network or your banking relationship manager. These no- or low-cost partners can provide an objective view, and some may offer a Payment Optimization Advisory service that will help identify and evaluate your working capital opportunities and suggest potential strategies. Another benefit is that the partners you work with already understand your operation, so there’s no learning curve involved to offer that second opinion.

The ‘Supplier Wellness’ Impact

Among the companies we meet, freeing up working capital is the top objective. But treasury departments often don't have sufficient access to what's really going on in the operation. They tend to rely on old cash flow forecasting methods. But in today’s environment, you need visibility to multiple data streams to make sound decisions.

For example, extending your days payable outstanding, or DPO, from 30 days to 60 is a classic method of freeing working capital. But given the ongoing challenges in the wake of the pandemic, there's a new wrinkle in that equation—supplier wellness. That is, companies need to take into consideration the impact extending DPO could have on your suppliers. It’s about having a holistic view of your operations, processes and goals. That means working with leaders across the organization, such as the COO or the head of procurement, to help you understand the nuances of different vendor relationships.

It also means you have to think about the cause and effect of your internal company decisions. Because if your suppliers are not faring well, that can lead to delays in receiving your goods, which would have a downstream impact on your business. For treasurers, it’s no longer just about freeing up capital in your operations. It’s understanding how vendor relationships work and the consequences your decisions could have on your suppliers and other partners. It’s important to note that new financial solutions keep entering the market, and many of them unlock working capital for both the buyer and supplier.

Demonstrating Leadership

Along with the benefits to the organization, taking a strategic approach to unlocking working capital puts treasurers in the position of being thought leaders within their organizations. It also provides CEOs and owners the confidence that their treasurers are thinking strategically. Ultimately, taking a qualitative approach to unlocking working capital can help elevate your contribution to your company’s success.

By strategically unlocking working capital, you're putting yourself in a better position to take advantage of the opportunities that can benefit your business down the road. And you didn't have to borrow at high interest rates to mobilize that capital within your operation.