- Organizations are reinvesting cash into the working capital cycle to drive greater value
- Incorporating a value framework can help align cash deployment with strategic objectives
- A dynamic, enterprise-wide approach can also improve efficiency, value/risk returns and operations
Congratulations to organizations that have successfully optimized working capital. But how will you reinvest your freed up cash? Many organizations that short-change this process miss valuable opportunities or create small gains at the expense of larger losses.
REINVESTING IN THE WORKING CAPITAL CYCLE
Long-standing approaches to capital redeployment have included organic growth or acquisition and returning excess capital to shareholders to name a few. However, many treasurers are utilizing another alternative for freed up cash, one that capitalizes on the increased understanding of cash flows, value drivers and cause and effect relationships that come from active working capital management. It is the reinvesting of cash back into the working capital cycle.
INCORPORATING A VALUE FRAMEWORK
Increasing working capital can be perceived negatively. For example, if you have a supply chain team tasked to reduce inventory, how do you realign metrics to reflect a strategic objective in another area that relies on inventory increases?
To help with questions like these, an enterprise-level value framework is advised. The framework offers a holistic view of your organization and identifies systems that need to work in unison to create value. It can identify potential trade-offs to deployment decisions, such as how much cash to retain on the balance sheet for an assessed level of risk, and what is the associated "cost of carry" of that cash?
UNDERSTANDING CAUSE AND EFFECT
A value framework can highlight trade-offs not measured by the same unit of value or that have consequences that require different metrics. Reputation risk is a good example. At what point does increasing payment terms risk negative brand impact from suppliers, customers or the general public?
Your framework helps define working capital as a liquidity management tool. It identifies factors that impact your desired outcome and that are controllable. Mathematically, this is represented by Y = f (X), where Y is a function of X, and Y represents your process output.
BEST PRACTICES FOR SUCCESS
The process of optimizing working capital is an ongoing one, requiring constant understanding and an established framework. To meet this need, treasurers should consider expanding their remit to include ownership of enterprise-wide working capital management.
Looking for more cash to redeploy? Don’t miss Part 1: Squeezing Cash Out of Your Supply Chains