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Head2Head: A Balance of Economic and Process Efficiency

by Bruce Meuli and Jonathon Traer-Clark, Global Business Solutions executives, Global Transaction Services, Bank of America Merrill Lynch

In this instalment of Bank of America’s ‘Head to Head’ series, Bruce Meuli and Jonathon Traer-Clark focus on the importance of working capital management, and highlight some of the challenges, both operational and strategic.

Bruce MeuliBM Recently, I’ve spent lots of time with companies to help them improve working capital management. It’s a rich area but rife with varied opinions and practices. For starters there are numerous ways to define it. I think everyone agrees the objective is to make more capital available to the business, to free up and create a pot of money that can be used to support corporate priorities and drive return on capital. In terms of how you get there, some companies use an accounting definition or they frame the discussion around the cash conversion cycle. Few have the ability to define working capital at a process level. By not doing this, they lack sufficient visibility of the causal factors driving working capital, leading to incomplete analysis and missed opportunities.

Jonathon Traer-ClarkJTC For me, the first question is whether this is a matter for treasury in isolation. You’re right that working capital management touches the whole company and is influenced by a wide range of factors like seasonality, key business locations etc. so you have to understand the sales organisation and sales patterns. It also has an impact on relationships with suppliers and vendors, and how you manage stock levels. While this is a fantastic area of opportunity for treasurers to extend their value-add, other parties in the supply chain and finance departments have equally appropriate skills, so it may make more sense for these departments to take the lead for working capital.

Bruce MeuliBM That’s certainly one area of debate. Another is the assumption that good working capital management just equals extending payment terms with suppliers. It’s a real bugbear of mine. Of course it’s appropriate to analyse and segment your supplier base, creating payment policies based on requirements of all parties across the extended enterprise. But I would argue that it isn’t good business practice just to push your payments out across the board. After all, vendors and suppliers are also company stakeholders. If you simply push your cash flow issues onto their plate, this may not be a sustainable long-term solution for either party, creating adverse economic and operational costs to your business. It’s no surprise we’re seeing national regulators now looking at best practice supplier engagement.