Cash & Liquidity Management

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Receivables - Enhancing Receivables for Improved Business Performance Since the start of the financial crisis, working capital management has become a dominant theme for corporate treasurers. In a constrained credit market with a high cost of borrowing through overdrafts or the capital markets, corporates are forced to look internally for ways to address costly inefficiencies in the financial supply chain, unlock working capital from within the business and make savings through operational efficiencies.

Enhancing Receivables for Improved Business Performance

by Mohammad-Ali Faruqi, Receivables Product Manager, EMEA, Citi

Since the start of the financial crisis, working capital management has become a dominant theme for corporate treasurers. In a constrained credit market with a high cost of borrowing through overdrafts or the capital markets, corporates are forced to look internally for ways to address costly inefficiencies in the financial supply chain, unlock working capital from within the business and make savings through operational efficiencies.

Today’s Limitations in Working Capital

According to a recent CFO.com working capital survey, there is €550bn of trapped liquidity in the top 1,000 companies in Europe, and more than $750bn amongst the top 1,000 in the United States. To understand this further, Citi performed an analysis of 20 of our top 3000 customers worldwide. We found that these customers lag behind the median for their industry for days sales outstanding (DSO) by between 1 and 20 days, and have an average of $1.3bn in trapped liquidity.

Improving operational efficiency and cash management processes to release trapped liquidity has an impact beyond working capital metrics. Companies that are more liquid and have a high degree of organic funding have generated, on average, 15-18% in incremental returns over the past 18 months. Stock price performance of more liquid companies is 27% higher than their peers with a greater reliance on external borrowing.

Working Capital Potential

Industries with complex supply chains and global operations typically have the greatest potential for working capital improvements. By adopting best in class practises, we estimate that the typical multinational corporation (MNC) could reduce working capital financing requirements by up to 30% and boost earnings per share (EPS) by 2-3%.

It is in every firm's interest to maintain a robust supply chain in which their suppliers' as well as their own interests are protected.

As treasurers are well aware, working capital improvements arise by reducing days sales outstanding (DSO) and increasing days payables outstanding (DPO). However, while it may appear beneficial to pay suppliers later, this behaviour damages trust with suppliers, discourages favourable pricing and affects suppliers’ working capital, making them more vulnerable. It could be harmful to the company if key suppliers were no longer in a position to play their part in a company’s supply chain, so it is in every firm’s interest to maintain a robust supply chain in which their suppliers’ as well as their own interests are protected.

So if working capital improvements cannot be made by extending DPO, the focus should be on collecting cash as rapidly and efficiently as possible. While many people are aware of the opportunities for optimising accounts payable, there is less familiarity with receivables management techniques. Receivables are fundamental to every company’s financial supply chain; every treasurer wants to improve the collection of cash and reduce the value locked in inventory and receivables processes.

For example, enhancing the degree of automation in the reconciliation process allows timely updating of customer accounts so that overdue amounts can be followed up quickly; increasing transparency over the order and invoice and collections processes minimises invoice disputes and enables timely resolution. The benefits of an efficient collections process extend to customers too. For example, without rapid reconciliation and a timely invoice dispute process, buyers may be prevented from placing orders or receiving goods if credit lines are not promptly updated.

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