WORKING CAPITAL MANAGEMENT CONSIDERATIONS FOR CORPORATES

While there's no "one size fits all" approach — and corporate treasurers should tailor their strategies to reflect their industry, size, digital maturity and growth ambitions — there are four overarching strategies that should be top of mind for meeting the challenges of optimizing operating cash, maximizing yield and managing risk.

1. From paper to digital payments

Unlocking effective working capital management requires corporate treasurers to consider ways to increase their payment efficiencies — from both account receivables and account payables.

A seamless account receivables process enables a treasurer to access cash quicker, so it can then be deployed to enhance working capital. What does this look like in practice? Together with applying automated modules to streamline payment reminders for customers and ranking overdue payments by days outstanding, another much-used practice for treasurers has been to ensure customers have access to payment options that are both easy to use and fast-moving.

That might seem simple, but it is not always the reality for customers — particularly in the United States, where many corporates still rely on checks, despite the paper-based payment method being slower, costlier and more vulnerable to the risk of fraud when compared to digital alternatives.

Treasurers are, therefore, looking to implement digital payment methods into their processes, which can provide higher straight-through processing levels, faster collections, simplified reconciliation, increased transparency and lower costs, while also giving customers greater convenience, transparency and control of their cash flow. From an account payables perspective, leveraging digital payments brings similar benefits — ensuring efficient payments to suppliers, reducing manual processes and the associated risk of human error, delays and administrative burden.

To make this switch and keep costs manageable, treasurers can look to work with a single provider that already offers a comprehensive array of digital payment options. Corporates that stand to benefit the most from this option are likely services-based companies with a higher number of individual receivables, such as utility, media and telecom companies.^[1]

2. Consider supply chain financing programs

With today’s complex supply chains, managing working capital efficiently is a top priority for both buyers and suppliers but one that’s not always easy to manage. Buyers want to pay suppliers later, holding onto cash for longer, while suppliers want to get paid earlier to improve working capital. With both sides pushing in the opposite direction, it can be a lose-lose scenario with the potential for a strained relationship.

To meet these challenges, supply chain financing (SCF) programs are proving to be a valuable tool for large corporates in manufacturing and other industries, with the benefits extending to the long chain of small- and medium-sized suppliers. SCF programs achieve this by providing solutions to give both the buyer and supplier a path to agree on favorable payment terms.

Take the example of a manufacturing company that maintains multiple relationships with suppliers across a diverse supply chain. SCF programs can help when payment terms are extended without negatively impacting suppliers. In turn, their suppliers, once onboarded to the program, are paid early by a bank at a discount. The result is that the large buyer and its chain of suppliers can optimize working capital — a win-win scenario for both parties.

SCF programs are growing in popularity, not only because of the challenging macroeconomic environment but also due to the increase in technology solutions such as digital procurement tools and electronic invoice approval platforms, which have also helped expand SCF solutions for companies of all sizes and across industries. For instance, BNY’s advanced open account automation platform enables businesses to automate and digitize their entire workflow, enhancing efficiency and reducing costs and risks associated with current processes.

3. Ensure robust cash flow forecasting

Cash flow forecasting — the projected overview of a company’s incoming and outgoing cash flow — is an essential tool in managing working capital requirements. By anticipating cash inflows from sales and outflows for expenses, businesses can more easily identify potential shortfalls and surpluses to make informed working capital decisions.

Through data analytics and predictive modeling, treasurers can enhance their cash flow forecasts to help enable more accurate decision making. For example, by analyzing historical data with machine learning and Artificial Intelligence  technologies, treasurers have heightened visibility and the potential to recognize patterns and identify future trends — from highlighting high-risk, delinquent accounts, which can improve the collections process, to identifying which vendors offer early payment discounts and rebates.

Another way to ensure more robust cash flow forecasting is to select a vendor that can provide technology solutions to match the company’s business model and be integrated with existing platforms. Integration with existing corporate platforms is critical because if the data is insufficiently rich, treasurers may not have the comprehensive picture of working capital needed across enterprise resource planning (ERP) systems, treasury management systems and invoice generation. 

4. Centralize your liquidity 

By centralizing liquidity — the process of consolidating the management and control of an organization’s cash into a central location — corporates can use internal cash flows to balance working capital and avoid having to borrow externally. Take the example of a large technology multinational. To cater for its various business lines and the different geographies it serves, the company maintains multiple subsidiaries around the world — each with its own cash flows. For the central treasury team, which manages cash and liquidity across the organization, this introduces many challenges.

Without full visibility of the company’s cash flows, pools of liquidity may exist that are not utilized effectively. This could lead to a scenario where one subsidiary must borrow money to meet a short-term obligation, while another has idle cash that is not being deployed. By moving these disparate pools of liquidity into the center, the treasurer has more control over how they deploy or invest the company’s cash.

There are many innovative solutions designed to help corporates centralize liquidity. One increasingly popular option is virtual account-based solutions, which can help address complexities arising from varying account structures across multiple subsidiaries. For example, the large technology multinational could set up a virtual account for each of its subsidiaries or business lines that is linked to a centrally controlled account. This allows each business line to maintain their own virtual sub-ledger, while giving the central treasury team more visibility and control over the company’s overall liquidity.

Depending on the treasury team’s expertise, there are also solutions that go one step further — from setting up an in-house bank, which allows a company to manage its cash flows and funding needs internally, to building payments-on-behalf-of (POBO) and collections-on-behalf-of (COBO) structures, where a centralized entity within the organization processes all outgoing and incoming payments respectively.

A boost for flexibility 

Effective working capital management is key to maintaining a healthy cash flow and ensuring financial stability. By optimizing payments processes, considering supply chain financing programs, centralizing liquidity management and enhancing cash flow forecasting, companies can achieve more flexibility to navigate market changes and seize growth opportunities. Implementing these strategies can not only help improve operational efficiency but also strengthen financial resilience in an ever-evolving economic landscape.

^{[1] Frances X. Frei, "The Four Things a Service Business Must Get Right," Harvard Business Review, April 2008, https://hbr.org/2008/04/the-four-things-a-service-business-must-get-right}

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