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Managing Working Capital in an Uncertain Economy

Mark G. Metzler, CPA, CGMA, CEPA Director, Audit & Accounting

As we move slowly from the global recession to a modest—albeit uncertain— recovery, managing working capital remains a top priority for corporate financial officers. The keys to a company’s survival and its ability to begin growing again are liquidity, cash and working capital. The recent credit crunch has forced businesses that rely on short-term debt to rethink their strategy. Ben Bernanke, chairman of the Federal Reserve, said that “shortening the cash cycle and better use of working capital” are the most important factors as private-sector businesses struggle to overcome the current economic volatility and difficulty in accessing capital markets.

Good cash management practices drive performance through all stages of the business cycle. Developing a cash management culture is critical to achieving a company’s strategic objectives. Consider the following strategies for effectively managing your company’s cash:

  • Instill a cash-conscious culture to maintain a committed focus on cash. Communicate from the top down that employing a cash focus is critical and fundamental. Link performance goals and compensation at all levels to working capital metrics, revenues and profitability.
  • Establish a cash committee. This cross-functional team composed of representatives from across the company (e.g. manufacturing, purchasing, sales, finance) should focus on the cash-to-cash conversion cycle. The team should be responsible for evaluating ideas to enhance cash flows based upon an analysis of risks and benefits through a coordinated approach to target payables, receivables and inventory. Individuals working in the trenches, such as sales and purchasing personnel, are ideally suited to assess whether a plan is feasible.
  • Improve forecasting to ensure accurate and realistic assumptions. Accurate forecasting should be based upon a range of scenarios and risks so the company has an understanding of the key drivers of its cash position. Review and critically challenge underlying assumptions regularly.
  • Focus on inventory reduction. Reducing inventory is not always an easy task, but a quick assessment may result in some immediate opportunities. Longer-term, sustainable savings may require fundamental improvements in demand planning, inventory and safety stock policies, production planning and scheduling, lead-time compression and SKU rationalization.
  • Manage accounts receivables. Poor accounts receivable management typically results from weak credit and collection policies. Collections can be improved by the accuracy and timeliness of invoices. Management should focus on customer-specific payment performance and identify companies that may be changing their payment practices.
  • Extend payables carefully. One strategy to preserve cash is to delay vendor payments and force the extension on the This approach can damage supplier relationships or even deprive supply chain partners of the cash they need to maintain their operations. A better alternative would be to work with suppliers to establish an agreement acceptable to both parties. This might require accelerating payment to a critical supplier in order to preserve the integrity of the supply chain and prevent a disruption. Where the opportunity exists to renegotiate credit terms to overcome short-term cash flow issues, the early engagement of key vendors is vital.
  • Investigate technology solutions to automate operations and increase transparency and control. Companies often struggle with paper-based, manual processes for managing working capital, but those that have embraced new technologies have realized significant benefits and time savings.
  • Evaluate supply chain risk. Supply chain management is a complex challenge and finance- related problems add to the How do you know if your customers are in trouble and unable to pay for your products or services? If you sell your products outside the United States, you may obtain a letter of credit. The letter of credit provides a source of ultimate payment and can be used to secure inventory financing while goods are in transit. A caveat: Given the current state of international banks, these letters of credit may not be as reliable as in the past.

The old adage that “cash is king” is more relevant than ever. Businesses cannot survive without sufficient cash flow. In periods of uncertainty, working capital management must be a company’s top priority. An unpredictable economy is once again emphasizing the importance of maintaining cash for short- and long-term strategic initiatives.

Mark G. Metzler can be reached at Email or 215.441.4600.


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Mark G. Metzler, CPA, CGMA, CEPA

Mark G. Metzler, CPA, CGMA, CEPA

Director, Audit & Accounting

Employee Benefit Plans Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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