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Cash & Liquidity Management
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Prioritising Working Capital

by Bruce Gau, Regional Treasurer, Sub-Saharan Africa, Ericsson

Treasurers need to focus on the timing of a cash flow, rather than simply the value of the flow.  

Since the financial crisis first struck, working capital management became one of the key topics on treasurers’ agenda, particularly as financing has become less accessible and more expensive for many companies. In reality, effective management of working capital is essential to a healthy business whatever the economic situation, including an efficient cash conversion cycle and the ability to forecast cash flow with confidence.

Treasury organisation

Ericsson has a group treasury function based in Sweden, with sub-units based in locations globally, including in South Africa, which is responsible for cash and treasury management activities across sub-Saharan Africa. Optimising working capital is an important aspect of the role of the regional treasury centre, particularly accelerating the cash conversion cycle. 

Profitability and cash flow

Even though the economic situation is improving for many companies, with a greater emphasis on profitability rather than simply survival, treasurers need to remember that profit is not the same as cash flow. Even profitable businesses can run out of cash, particularly in an environment where liquidity is likely to remain scarce, which is one of the main reasons why a seemingly successful company will fold. To guard against this, treasurers need to focus on the timing of a cash flow, rather than simply the value of the flow. For a company with working capital challenges it is more important to collect cash as per forecast rather than a collection for a higher amount later. Consequently, there are three areas on which to focus in order to accelerate the cash flow cycle: the payment terms and conditions negotiated with suppliers; the lead time between purchase order and payment, and the credit period granted to customers. These issues are typically outside treasurers’ hands, so it is vital to communicate clearly with business and project managers how commercial terms agreed with both suppliers and customers, as well as the efficiency of internal processes, contributes to the financial health of the business. Issues such as complex acceptance criteria, payment postponements caused by project delays outside of the company’s control and change requests that have not been properly scoped can all affect not only the amount that a customer is paying, but also the timing (figure 1).