Controlling Cash Flows and Cash to Optimise Working Capital

While restricted access to bank-supplied credit lines and turbulent capital markets – ongoing effects of the global financial crisis – are proving problematic for the majority of corporates, small to-medium enterprises (SMEs) have been particularly affected. As a result, the mid-cap corporate focus has increasingly shifted towards optimising working capital management to free-up capital for short-term funding or to increase returns.

Unfortunately, unlocking cash from the value chain is a complex and costly task. For many, inefficient cash and working capital processes are an ingrained legacy from the days of free-flowing liquidity and, as such, will require significant effort and investment – as well as a so-called ‘long-term approach’- in order to be improved.

Certainly, this focus on the long term is vital. While making cost-savings is one way to enhance working capital, and can be achieved in a number of ways – such as reducing transaction float, optimising value-dating, establishing a cash-flow netting and changing the routing of cross-border payment flows. These are all finite approaches. After all, there are only so many savings that can be made, and they alone cannot overcome the many barriers that prevent working capital from flowing.

What corporates now need is a strategic and limitless approach to managing cash and working capital if their companies are to survive challenging economic times. Such an approach will require corporates to look inwards – at their current company structure, future strategy, transaction types and investment management – as well as at the full economic cycle and extended value chain to ensure that any working capital roadblocks can be overcome. 

Optimising Cash Flow and Cash Management

To an extent, a corporate’s flow of cash is a ‘natural’ process  – the expected and inevitable outcome of the business of buying and selling. Optimising working capital, however, requires a company’s treasury department to take ownership of and manipulate these flows to increase the amount of time that cash is held. In essence, the concept is simple – by accelerating the inflow of cash and slowing the outflow, a corporate will optimise its cash conversion cycle and have the possibility to increase its net working capital. In reality, however, it is not so straightforward and cash inflows must be skilfully managed if a company is to successfully oil the wheels of its commercial cycle.

Taking ownership of the incoming cash flows is dependent on two things:

  • Analysing transaction types: how money is moved from A to B.
  • A sound knowledge of delivery channels.

Firstly, payments can be received and executed via a number of means, such as transfers, cheques, direct debits, letters of credit, etc., and the associated costs and processing times and methods of each of these payment types will have a direct impact on working capital. Delivery channels are similarly crucial. As innovations in this area mean that multi-channel payment delivery – from traditional instruments to online to contactless and remote mobile payments – becomes the norm for companies, knowing where payments begin is a vital step in taking control of the incoming flow.

Investment and Risk Management

Of course, managing the two-way cash flows is just the beginning. Cash, once received, must then be managed and made to work for the benefit of the organisation. The most efficient and effective way to do this is to centrally manage company cash, through a central or decentralised account structure.  Indeed, the centralisation of corporate treasury management – which can include incoming and outgoing payments (conventionally handled within a company’s purchasing and sales departments), as well as liquidity and traditional treasury functions – has long-been recognised as a chief method for creating efficiencies in financial operations.

What is more, such centralisation can provide a further boon in terms of risk management, encouraging greater transparency of data and information. Given that risk management and cash management often go hand-in-hand, a holistic approach can only be for the good of a company’s working capital.

When it comes to risk mitigation working capital, foreign exchange (FX) and interest rate risk are key concerns. Any changes in FX rates as a result of volatility can eat into margins and have a detrimental effect on the amount of cash a company has at its disposal. Interest rate risk can have similar adverse effects, but can be mitigated by calculating and agreeing funding costs in advance – in the same way as FX risk can be managed by the use of exposure management instruments (e.g. forward contracts) – as well as by forward rate agreements on the borrowing side and by placing funds in short-term investment vehicles on the deposit side.  

Maximising the Cash Conversion Cycle

A company’s cash conversion cycle is a measure that illustrates how quickly an organisation can convert its products into cash through sales. The shorter the cycle, the less time capital is tied-up in the business process, which is better for a corporate’s bottom-line.

An efficient cash conversion cycle is built on the foundation of purchase-to-pay (P2P) on the supply side and order-to-cash (O2C) on the sales side.  One way to make this foundation stronger is through the ability to receive and process invoices electronically, which in turn will positively impact the speed and accuracy of the entire process. Another is by automating the invoice issuance process and analysing how orders could be used to create cash (by re-negotiating payment terms and credit conditions, for example).

Yet this is only half the battle won. Unless these processes are aligned, any improvements to the individual procedures are futile. This is because imbalances in the cash conversion cycle can have an adverse effect on stock inventory management, leading to a piling-up of stock that can become costly and act as a roadblock to working capital management. Internal operational efficiencies are, therefore, crucial to optimising the cash conversion cycle and resulting working capital. This requires not only a move to electronic platforms, but breaking down silos between the treasury and business processes.

The Benefits of Partnership

As corporate treasury departments take a more active role in improving working capital management and driving organisations towards their goals, they are increasingly turning to their local banks for help. Many local banks, however, are hamstrung by their own organisational and operational constraints, as well as the growing cost and burden of regulation – rendering them unable to provide the sophisticated bespoke cash and working capital management solutions required by progressive corporates.

Clearly, this is to the detriment of both local banks and corporates. Companies that are unable to gain local access to the services and solutions they need may find that they have no choice but to turn to the global providers – potentially resulting in a loss of local corporate business for local banks.

Yet corporates also stand to lose, despite having the option of turning to global players. Although global institutions are able to provide the necessary technology, they can lack the local market expertise that is so important to SMEs in particular. In addition, global players are likely to offer solutions that are aimed, and priced, for the international arena, meaning that the obtained service is unlikely to address the working capital needs specific to the mid-cap sector. 

One option for local banks that wish to maintain and expand their local corporate relationships is to enter into partnership with a global provider that help them to address the specific cash and working capital management needs of their local clients. Of course, partnership is hardly a new concept but, in order to be successful, what it means must be redefined. It is imperative that such relationships are based on local and global institutions working as equals and benchmarking each other on an equal basis. This means that the more conventional partnership models, such as conventional outsourcing, may not be agile enough, or offer local banks enough autonomy to be suitable in today’s market.

With this in mind, an ideal partnership solution for local banks that wish to meet the evolving cash and working capital management needs of their corporate clients is what BNY Mellon calls the ‘manufacturer-distributor’ partnership model.

This more collaborative form of local-global bank partnership is based on the concept of local financial institutions  or ‘distributors’, leveraging the global transaction processing capabilities of specialist ‘manufacturer’ organisations in line with the needs of their domestic markets. Such an approach, in combining local touch and global reach and capability, results in a corporate-client offering that benefits from the best of what local and global institutions have to offer. A true partnership philosophy such as this, which is focused on corporate needs, is what is needed to help companies unleash capacity and keep cash and working capital flowing. 


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