Capital management services liquidating file
Having battened down the hatches over the past few years, businesses have significant cash reserves. “If demand is picking up and macroeconomic factors are going to come back, companies have to be a little bit more inclined to loosen their credit policies for customers and maybe have aggressive investment policies to improve inventories, acquisitions of raw materials and the production process, which require some of this cash in the process,” Winslow notes.
Weitzman advises companies to seek out best practices.
“Look at other industries as well as your competitors, and be open to feedback,” she says.
This kind of scenario can swiftly lead to a negative cycle, Winslow notes.
As a company’s available cash is squeezed, its borrowing base also declines if it has an asset-based credit facility. The resulting constraints on the company’s borrowing ability may ultimately hamper its growth plans.
What’s more, efforts to improve working capital management can also affect a firm’s customers, suppliers and partners.
As many companies learned during the downturn, there’s a limit to how much they can extract from customers by pushing hard on receivables policies and requiring faster payments — jeopardizing their goodwill and, perhaps, future sales.
The problem was that the large wholesaler’s policy required that it be paid in five days, rather than the payment terms of 45 to 60 days the retailer had negotiated with the smaller wholesalers.Business school case studies are littered with examples of management teams failing to pull the levers of working capital — that is, making inventory turns faster, payable terms longer and receivables collections shorter — to the detriment of their companies’ financial sustainability.According to Craig Winslow, chief credit officer of GE Capital’s retail lending business, many of the companies that have gone out of business recently “might still be in business today, but they ran out of that precious working capital capacity and had no other means but to file bankruptcy and liquidate rather than run through a restructuring in an organized manner.” Despite the importance of working capital management — which is often considered a proxy in the investor community for the strength of how well a company is run — mastering the fundamentals of payables, receivables and inventory control poses a challenge for firms of all sizes. It’s all about freeing up the company’s cash,” says Patty Weitzman, managing director of GE Antares.By reducing the cash conversion cycle — a key metric monitoring the length of time between when a firm buys a product from a supplier and the collection of payments from customers for that product — “you can improve the profitability of a company significantly,” reports Rabih Moussawi, director of Wharton Research Data Services.Moussawi’s research suggests that $1 tied up in net operating capital is worth less ultimately — 52 cents, on average — for shareholders than $1 held in cash that can be invested in growing a business. While knowing the optimal level of working capital is never easy at any company, his research shows “room for improvement.” At a minimum, firms should rethink old policies to reflect a new operating environment, says Winslow. and European companies are, in fact, sitting on as much as $2 trillion in cash over and above what they need to operate their companies, reported the May 2011 edition of .The same is true with payables if a company is too slow to pay suppliers.