• Credit, credibility and credit ability in funding and managing working capital

    The perception is that credit is becoming dearer as banks raise their interest charges and their costs of servicing of any sort of credit and especially with regard to funding working capital.

    Why? Working capital can be manipulated by accounting techniques and is often not recorded accurately enough at the level of granularity required to satisfy lending/funding criteria

    The issue however is one of credibility. If one researches and reviews how credit is ‘scored’ and ratings arrived at one will find all manner of algorithm’s and so called justifications based on ‘hard choices’ namely numbers that supposedly portray your level of credit that is ‘acceptable’

    However the real level of credit should be based on ‘soft choices’, namely one’s ability to be able to regularly pay the required amounts for a sustainable period of time.


    Several steps should be taken by any business/organisation if applying for funding of working capital namely:

    a)      Understand the exact requirements of each funding amount i.e., is it to fund capex, Mergers  Acquisitions, disposals, restructuring, efficiency savings via technology spends, or to cover amounts of VAT, Tax or a bad debt etc.

    b)      One should arrive at a real DSO/DPO/DIO through analysing the trade debtors/creditors/inventory in great detail and applying any reserves in a logical and dynamic manner.

    c)       Deliver a strategy for Working Capital that embraces learning and development needs for all functions across the organisation/business to deliver cash.

    In conclusion one should be able to produce a document highlighting the above, so that the ability of the organisation/business to fund its obligations in a sustainable manner is clear for all to see.


    Posted on: June 17, 2014 by: mardle0312

    Cash, Credit, Capex and Culture via Communication

    Q1 2014 has seen the first reduction in the corporate cash mountains that have grown since the 2008 crisis. The reduction is due to large dividend payments, share buy-back programmes and indeed a significant amount of CAPEX (Including M & A) as the need for innovation and growth is now required to meet stakeholder expectations.

    Credit has played its part in this scenario as the credit agencies are duly increasing their credit ratings and credit limits for many of the corporates who are embarking upon the above journey, especially if they have paid back expensive debt too.

    However, how does one communicate this through the corporate organisation and to your customers, suppliers, investors, employees and other interested parties?

    Also how does the culture- the functions- in the organisation that were once ‘starved’ of cash and reducing costs now turn on the tap to create demand from customers, suppliers and investors?

    If the lines of communication are not balanced then one could soon see ‘overtrading’ occurring as profit outstrips available cash. In some organisations the demand chain will become out of sync with the supply and inventory chains which again could impact the investment chain when need for liquidity occurs.

    Cash forecasting becomes key, as this is normally the ‘communication’ tool however this tool is at the end of the ‘financial supply chain’ process.

    One needs to be agile and proactive by being immersed in the sales/procurement/operational and treasury teams to ensure that ‘checklists and balances’ are in order and that the culture of cash interdependence is upheld throughout the organisation. Early warning metrics are needed.

    In real terms this means communication lines between sales/procurement/operations and treasury being made strong but flexible. This is accomplished by salient KPI’s and metrics that support the cash conversion cycle of DSO, DPO, DIO and ‘allows’ for the capex(M &A)  scenario(s) mentioned at the outset of this post.

    Posted on: June 12, 2014 by: mardle0312

    Working Capital Strategy checklist published in Treasury Insights 12th June 2014

    Ensuring working capital is being used in an efficient way can transform a business. But it is important to make a distinction between working capital optimisation and merely releasing working capital. We look at some of the best ways for the treasury function to devise an effective working capital optimisation strategy.

    Earlier this month, research published in the UK put the spotlight on how some businesses try to fund their working capital. In ‘Charting the Trade Credit Gap’, the Credit Management Research Centre at Leeds University’s Professor Nick Wilson, and credit research group Taulia claim that the £327 billion of trade credit between non-financial companies is now the biggest source of credit in the UK economy. This makes it 20% greater than outstanding bank credit.

    According to the report’s authors, struggling companies often try to finance their working capital by paying suppliers more slowly.

    But working capital management is not purely a concern for businesses experiencing solvency issues. Nearly all companies can benefit in some way from optimising their working capital.

    Many people think that releasing working capital is the same as working capital optimisation (WCO). However, releasing trapped working capital is simply reviewing inefficient processes, whereas WCO is more about getting an effective financial supply chain in place. This means being proactive in areas from strategic alliances to delivering efficiencies in the cash conversion cycle.

    WCO checklist

    Treasury Today spoke to John Mardle, Managing Director and Working Capital Facilitator at CashPerform Limited, about how companies can optimise their working capital. Mardle has ten tips for reviewing a strategy to achieve working capital optimisation:

    a) WCO programmes must extend beyond the finance function and engage the company’s entire managerial team. Do not think that all working capital management problems can be addressed by treasury alone. Appoint local working capital strategy leaders or champions across the organisation.

    b)Do not artificially adjust working capital levels through delaying payments to suppliers or indiscriminately stepping up collection activities in order to boost quarter- or year-end performance metrics. In business, as in physics, every action is met with an opposite reaction. Delaying payments to vendors may reduce working capital over the short term, but that improvement is likely to disappear over time as vendors adjust their pricing accordingly. Dynamic discounting is now prevalent.

    c)Incentivise people to achieve their WCO targets by compensating staff accordingly, particularly at managerial level. User-driven key performance and risk indicators should measure the underlying causes of DSO, DPO and DIO. Take steps to monitor and manage these findings.

    d)Make a consistent effort to optimise working capital. It may be tempting to take the focus away from working capital when the company is growing as there may be less immediate need for it. Equally, in times of crisis, attention can be diverted elsewhere. Ignoring working capital could significantly inhibit a company’s ability to grow and meet demand once business rebounds.

    e)Ensure all hopes are not pinned on ERP implementation. Although ERP systems can provide significant benefits in the working capital arena, in the near term they can cause deterioration in working capital performance as key managers and employees are distracted from their daily routines and forced to fine-tune the new ERP system. Mobile applications are proving robust and agile.

    f)Ensuring suppliers and customers are collaborating effectively is now very much to the fore in demand chain management. Connect suppliers and customers across the enterprise to achieve maximum benefits.

    g)Provide added value for your suppliers. Major organisations are now using web portals and the like to deliver seamless accounting transparency for all their suppliers and their financial transactions too, wherever they might be in the world. Supply chain finance is now a major part of suppliers’ funding arrangements.

    h)Do not allow debt to become overdue before identifying and resolving disputes. Contact customers before payments are due to resolve any potential disputes and for delinquent payments, assign collection responsibilities to individuals and escalate the responsibility to more senior employees as invoices become further overdue. Have credit management as part of your strategy at board level.

    i)Develop forecasting techniques that incorporate intelligence from all relevant business segments, including not just sales but manufacturing, distribution and marketing. Evidence from these forecasts will assist in the production of company financial statements to investors in line with the Companies Act  2006, amended in October 2013 (Strategy and Directors’ Report Regulations).

    j)Look holistically at the whole financial supply chain. For example, is there a direct correlation between inventory management methods and the level of customer service that a company can provide? Do not allow one area to suffer as a result of  focusing attention on another.

    The journey

    Obviously there is no one-size-fits-all solution to optimising working capital. A lot will depend on the nature of the business and the profile of the company’s cash flows. But this advice should provide a sound point at which to start along the road to achieving more efficient management of working capital


    ‘Cash/credit are strategy, in that both, are like the life blood of an organisation, as restriction or termination of either can be measured, as the organisation deteriorates, or hopefully, improves.’

    The statement above requires three areas (levels) to be addressed within your organisation.

    The first level is whether you, as a ‘C’ level executive team , have a strategy regarding your financial supply chain and investment/cash/credit chains? If so what does it look like?

    The second level is whether the organisation understands the Working Capital Management and Optimisation criteria? Is implementation a project or a programme of work? If short term then, to measure ROI, the project approach could be very effective. Otherwise a programme may be required.

    The final level is the practical approach through Cash Conversion Cycle efficiency. This is where the physical transactional process needs to be amended to deliver the required savings.