Author Article List

Unlocking Working Capital Can Be Key To Improved Financial Performance: Strategies To Consider

Published on Monday, September 01, 2003

As companies vie for position and competitive advantages in an increasingly complex global financial environment, how efficiently working capital is managed takes on even greater significance.

Every dollar locked up in working capital bogs down a corporation’s financial performance. If capital is locked in the supply chain, or receivables/payables are not being managed effectively, a company is unable to use its cash flows to its best advantage. This could result in higher capital expenditures or the need to turn to the equity or debt markets to supplement cash flow.

However, once working capital is unlocked, every dollar can support investment and value creation for the present and future.

Adding Value to the Treasurer’s Role

In the past, corporate treasury served as a support center for a company’s business units. The treasurer’s responsibilities usually included overseeing payments and collections, making cash flow decisions to ensure daily liquidity, and gathering and analyzing financial information to support these efforts through activities like cash forecasting. But in recent years, treasurers have begun to play a more strategic role.

“One of the toughest challenges facing treasurers today is getting control of global cash,” notes Michael Golden, Senior Vice President of Global Liquidity Management at Bank of America. “However, the ability to control cash and maximize its use will enable the treasurer to assume a more value-added role within the corporation.”

Current Business Climate Raises Stakes

Numerous factors are forcing corporate treasurers to optimize their working capital and cost-effectively fund vital business requirements. One of the leading impetuses for corporate treasury to work at its highest possible level is an economy that has eroded revenue and put a greater focus on improving efficiency to maintain profitability. Global competition, global market volatilities and the demand for increased shareholder value also are dictating optimal working capital processes.

What’s more, as traditional external funding sources become less available and more expensive, organizations are being forced to find alternatives to debt, which include mobilizing internal liquidity to maximize yields and lower funding costs. Finally, high-profile corporate governance mandates are driving treasurers to get a clear picture of enterprise-wide cash positions, both to mitigate risk and ensure that they have the ability to meet current obligations.

As some treasurers already have discovered, maximizing the use of capital resources has allowed them to recapture significant amounts of money that can now go toward research and development, acquisitions, share buybacks, paying down debt and even dividend raising. Working capital management is an untapped treasure-trove for increasing shareholder value and improving the bottom line. Here are some suggestions how to achieve these goals.

Obtain and Manage Information More Effectively

“Getting accurate, real-time information and finding out where liquidity is are vital to the treasurer’s ability to maximize working capital,” states Golden. This is why treasury workstations interfaced with Enterprise Resource Planning (ERP) systems and their bank provider systems are some of the most powerful tools available to treasurers. ERP provides real-time financial information from every functional department within a corporation. Market subscriptions and websites also give treasury personnel access to almost any data that affect their company’s operations. Other treasury technology helps to gather, consolidate and report some of this critical information.

The real key, however, is to garner financial value from this influx of information, and use it to measure the cost of each financial decision. Treasurers need to have analytical tools to automatically sift through all this data and provide them with precise strategic information and costs. Without these tools, expenditures on information and data systems are worthless.

Many treasurers also are integrating their ERP systems with internal systems, such as treasury workstations, as well as with their banks and other key external partners to develop straight-through processes. By doing so, they enjoy the added benefit of improved cash-flow forecasting, both a key driver to achieving precise working capital management and reaching treasury objectives.

Improve Working Capital Processes Before a Crisis Arises

For many corporations and treasurers, working capital management has been viewed as a strategic priority. It is sometimes ignored in favor of other seemingly more urgent or high-profile tasks, such as mergers, acquisitions, divestitures or new product launches. Yet, by waiting for a crisis to occur before concentrating on working capital or scrambling to raise cash, treasurers can jeopardize their corporation’s financial stability. In fact, treasurers should consider which everyday tasks can be outsourced, so they can concentrate on freeing up cash.

Make Working Capital a Company-Wide Priority

Managing working capital can be a daunting task for treasurers to handle alone. “There has to be senior leadership buy-in, as well as agreement throughout the whole organization that (controlling cash) will be a priority,” says Golden. In fact, the quality of a company’s products or services, how quickly they’re delivered and the level of customer service all impact working capital. For working capital management initiatives to be successful, they must extend to the sales force, the purchasing department, production facilities, and even accounts payable and receivable.

Contact Customers Before Payments Become Overdue

One way to improve receivables payments and customer service levels is to categorize customers according to the value of their business and focus collections on those who owe the most. By contacting those customers who generate the majority of receivables before, and not after their payment due dates, companies can immediately address any problems that could delay payment.

Have a System in Place for Handling Disputes

Companies with strong working capital performance have a dispute management process in place that assigns resolution responsibilities to specific individuals. When disputes remain unresolved beyond a pre-determined time limit, they usually become the responsibility of senior staff. It’s a proactive way of doing business, and it’s a proven method for improving receivables.

Consider Obtaining Supplier Discounts for Early Payment

Although many companies negotiate extended payment terms from their suppliers when cash flows are tight, it could be just as valuable and profitable over the long run to negotiate discounts for making early payments. In fact, companies that rely on payment term extensions time and time again may find that the costs of their goods and services eventually increase to cover the expense of those extensions. What’s more, competitors who pay promptly may be enjoying discounts and other cost concessions that could be difficult to undercut.

Try To Balance Inventory with Customer Needs

While some customers may need goods for next-day or same-day delivery, others are willing to wait a week or more to receive shipment. Still others may be satisfied to receive a portion of their order the next day and the rest in a week or two. It pays to talk to customers to determine their specific needs. Rather than trying to have all orders delivered in full from inventory in one shipment, companies can stagger shipments to free up cash, floor space and operating expenses that result from excessive inventory. Many of the companies successful at managing working capital are the best at predicting demands on inventory.

Get an Accurate Measure of Days Sales Outstanding (DSO)

The best way to gauge how much cash is flowing into a corporation is to measure the DSO, which is total receivables divided by total credit sales for the period, multiplied by the days in that period. Presumably, the lower the DSO, the faster a company is converting receivables into cash. However, that isn’t necessarily the case. A DSO can be low because a company is issuing credit notes to clear disputed items — a practice that doesn’t generate additional cash.

To get a more accurate measure, compare the actual DSO, as described above, with the best possible DSO (the DSO that could be achieved if all customers paid at their exact payment terms). For example, if all sales were made at 30-day terms, the best possible DSO would be 30. The true performance measure is the difference between best possible DSO and actual DSO. Measure it and break it down into three components: disputed debt, bad debt and delinquent debt — and then address the problems that have created those debts.

Fine Tune Receivables, Payables and Inventory

Any working capital management initiative should include immediate action to improve all three areas in an organization: revenue management (receivables), supply chain management (inventory), and expenditure management (payables). A strategy that encompasses all three will prove to be the most rewarding. For example, recent studies show that large multinationals have improvement potentials in the range of several hundred million dollars. At the P&L level, returns on investment can be as high as 10 times.

Choose the Right Financial Partner

Golden feels that “liquidity management is a key component of working capital management.” What’s more, he firmly believes that “liquidity management structure and solutions need to be tailored for every business.” When choosing a bank provider, make sure they have the tools, techniques, capabilities and consultative approach to devise the appropriate solution for you.

This article appeared in September 2003. (BA)

Getting into the Act: How Will Sarbanes-Oxley Benefit Treasury?

Published on Monday, September 01, 2003

Right now, U.S. corporations and their treasurers are working hard to comply with the Sarbanes-Oxley Act and all its requirements. This is no easy task, considering that compliance with the requirements in Section 404 of the Act could mean a complete overhaul of internal financial reporting and procedures for most corporations.

In general, Section 404 of Sarbanes-Oxley (and new Item 308 of Regulation S-K) require management to prepare an annual report on the company’s “internal control over financial reporting.” This term is defined as a process, under the supervision of the company’s CEO and CFO, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. In addition, the company’s external auditor must provide an attestation report on management’s assessment of internal control.

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Online FX: Letter-Perfect or Not?

Published on Monday, September 01, 2003

Treasurers are gradually warming up to the idea of online FX. Once limited to a dial-up system in the early 1990s, FX transactions quickly moved to the Internet, thanks to the development of and improvements in global communications. Today, the Internet’s proven to be a fast, convenient and secure medium for FX transactions.

Although online FX volumes have grown steadily, experiencing their biggest increases over the last two years, many treasurers are still reticent to jump on the online FX bandwagon. According to a GTNews survey conducted in 2002, treasurers stated that they were unwilling to buy into eFX unless they were convinced of its straight through processing (STP) benefits.

Automation Is Key

The automation or STP of FX transactions eliminates a number of manual steps, including the keying of tickets that brings the possibility of transposition errors. What’s more, the processing of an online transaction can now be completed in seconds instead of minutes. That means treasurers will be able to spend fewer hours on administration and more time on critical issues, such as risk analysis and risk management.

Automating some or all of the trade process also provides a better audit trail, greater structure especially in setting individual trading limits, reduced trading costs, and more control for the treasurer and corporation.

Finding the Right STP Solution

When looking for the STP system that will work best for their company, treasurers need to consider several key points:

1. What system offers the best end-to-end processing of transactions with the least chance of human error?
2. How important are real-time data and updates? Does the STP have to be real-time? Does the transaction need to be in the Treasury Management System (TMS) seconds after the trade or is a 10 to 15 minute delay okay?
3. How secure is the system, and can the data integrity be trusted?
4. Does the TMS have an interface? If so, what type? What message formats does the interface support?

Automating the End-to-End Trading Chain

The ability to automate FX transactions from quote to settlement may give treasurers a compelling reason to move to online FX. This would involve allowing front-office staff to link into trading portals from their internal work processes and systems. Deal tickets, confirmations and settlements, accounting entries, and hedge tracking systems should all be automated to provide the convenience, speed and productivity treasurers are seeking.

Many participants in the E-trading industry have been working to develop and deliver standardized interfaces and messaging formats to facilitate integration between the buy and sell sides — and to simplify automation of information and processes within the corporate front and back offices. For these initiatives to be successful, however, the corporation needs to have up-to-date treasury automation in place.

The Value of Real-Time Data and Updates

Some corporations only need hourly or daily updates of their back and front office positions. However, a number of large corporate treasuries have invested in an integrated treasury system to ensure that their front and back office positions are always the same, and that positions are maintained in real-time so that treasurers have the most accurate and up-to-date record of their positions as possible.

If an STP system doesn’t offer true real-time capability, the position records in the treasury system could very well be inaccurate and unreliable. In addition, if the data update needs to be manually input immediately after the deal is executed, there is a greater risk of both human error and an inaccurate position record.

The Importance of Security

Commitment to Internet security has to be considered a top priority from management on down for treasurers to feel comfortable about online FX. A corporation’s security will not only depend on internal controls and awareness, but will involve its partners, banks and other third parties.

The first step to ensuring security is to establish and write down specific security policies — and clearly communicate them to all staff, partners and third parties. Even with established policies, companies need to be aware of internal and external risks that exist, such as employee fraud, misunderstandings or disagreements with formal procedures, and hackers.

To prevent a single person from committing fraud, corporations should split duties and critical decisions between two or more people. A good Internet security program also uses procedures that protect physical systems, including:

Authentication

An identification used to prove that the people online are who they say they are. This could be a user name, password or mother’s maiden name; a digital certificate, hardware token or private network; or an iris or retinal scan, fingerprint, or hand geometry. The best authentication procedures use at least two identification mechanisms.

Authorization

Verifies that the person has permission to perform a trade or other specific action on behalf of the company. Authorization is enforced by data stored in the corporation’s databases and can be granted by using the private key of a digital certificate.

Integrity

Ensures that information is not changed or tampered with by any non-authorized users. Integrity can be assured by storing independent copies of the trading transaction data, such as the buyer’s treasury system, the seller’s trading system and the independent marketplace database.

Privacy

Protects sensitive data from theft or misuse. In the Internet world, cryptography is the mechanism that safeguards data privacy. For corporations with partners or third-party providers, they must have contracts that clearly describe privacy policies and how the corporation’s information is handled.

For online FX to become a regular, viable activity for corporations and their treasury, users and providers must have physical, electronic and procedural safeguards in place — and provide training to ensure everyone involved knows the importance of observing these security measures.

Choosing a Provider

Most treasurers choose a single-bank trading platform because multi-bank platforms are only available to corporations that have trading relationships with many banks — plus these services can be very expensive. According to Jane Guyett, Managing Director, Global Foreign Exchange at Bank of America, “The single-bank platform usually offers a wider range of functions, real-time price quotes, and more products than multi-bank platforms. In addition, if treasurers have a strong relationship with one bank, they can leverage the single-bank platform to enjoy a higher level of service.”

How Letter-Perfect is Online FX Today?

Both STP and online FX are getting better all the time. Yet, there are still some challenges to be worked out. Most STP solutions have not been integrated into treasury applications from beginning data entry through settlement. Many still require the use of two applications: the treasury system to establish FX positions, and the FX trading platform to execute trades. Plus, there is still some inherent risk to data integrity.

“The good news is that more and more corporations are becoming aware of the value of automating treasury management systems,” says Guyett. “At the same time, they are centralizing both FX risk management and transactions to achieve greater control and efficiency. So as treasury automation extends globally, it will be easier for the treasurer to manage FX transactions and risk for all operations.”

As more countries become familiar with the ease and efficiency of online FX, banks with an established presence in these markets will be able to promote international trading in their currencies. This could eventually provide better information on pricing and cultivate the growth of eFX in emerging market currencies.

The Future of Online FX

Once STP becomes better integrated between corporate TMS and online FX platforms, a greater percentage of trading will move online and away from the telephone. The ability to transfer trade information directly into a TMS without any manual ticket writing or human intervention will greatly reduce errors – and ultimately cut expenses for monitoring trade flows and correcting erroneous trade details.

Someday soon, online FX will be a continuous process that allows treasurers to always be logged into their treasury system. Without ever needing to log into any other system or application, treasurers will be able to view positions, generate trade requests, execute, confirm and settle trades automatically, and even authorize payment transmissions — all with the click of a button. And considering how far online FX has progressed and continues to do so, that day won’t be far away.

Open Account Trade Closes Supply Chain Inefficiencies

Published on Monday, September 01, 2003

A letter of credit (L/C) is a tremendous tool for managing international financial risk. And limiting financial risk is an essential part of any successful global transaction. But a new trend toward open account — which is gaining momentum — is helping to streamline supply chain operations and eliminate inefficiencies.

The Good, the Bad and the L/C

In order to determine whether or not the foreign buyer’s debt obligations are likely to be paid on time, a number of questions must be answered. For example, is the foreign customer creditworthy for the shipment, or suffering cash flow problems that might delay payment? What is the foreign customer’s reputation for honesty and dependability? How long has the prospect been with his/her bank? When answers to these and other questions leave doubt, an L/C tends to be the document of choice.

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