Squeeze more working capital

August 19, 2009
by Jim Kilpatrick and Lee Barter

Today’s unprecedented credit crunch is forcing companies to free up working capital any way they can. Even businesses that appear to be in pretty good shape may not be immune. What would happen if your company’s bank suddenly cancelled its line of credit? Could you keep your operations going? And for how long? The cold, hard truth is any company that relies on short-term debt may be just days away from serious trouble.

Deloitte surveyed supply chain managers throughout Canada to understand exactly how the current credit crisis is affecting them. More than 80% say supply chain and manufacturing have a high level of responsibility for working capital management. A similar number expect the current credit crunch to have a significant and lasting impact over the year, if not longer. Here are 10 useful practices and strategies that will help you tackle the credit problem effectively:

You may have experience negotiating the sharp turns of economic recession, but strategies that worked before might not be good enough this time.

1. Focus on the cash-to-cash conversion cycle. Companies normally focus on growing the top line while managing the bottom line. Routine back-office activities such as paying bills and turning receivables into cash are often taken for granted. Of course, these are not normal business conditions. That’s why smart companies are shifting their focus from the income statement to the balance sheet. Of the three elements of supply chain working capital—payables, receivables and inventory—supply chain executives have a tendency to focus on inventory. To minimize working capital requirements, apply a coordinated approach that addresses all three areas.

2. Think like a CFO. Supply chain managers generally spend their day thinking about operations and don’t pay much attention to finance and treasury issues. More often than not, inventory levels and other critical business parameters are driven by customer service requirements and operational capabilities, not financial constraints. But what if the situation was reversed? What if working capital was the company’s primary constraint on inventory, and supply chain managers were given the challenge of making it work? How would that affect your supply chain and inventory practices?