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double-edged sword of today’s financing environment: it demonstrates health to the bank and is without a doubt the fastest way of pumping additional funds into the business. Indeed, releasing cash tied-up in the business is cheaper, less risky and undoubtedly much easier than going to lenders for funding to support growth, increase headcount, and pay down debts.


Sustainable strategies


In recent years many firms have turned to short-term tactics to improve their working capital: hoarding cash, cutting costs and inventory levels while pursuing collections more aggressively. But in most cases, the gains made by employing these policies have reached a predictable plateau. Since most businesses can no longer rely on the capital markets or banks to meet their total funding needs, they will have to make the change to more sustainable long-term strategies to give them the flexibility to fund growth and maintain or increase profitability.


sustainable strategy.


On the other hand, with inventory it is critical to take decisions quickly: identify and invest in high-value, fast- moving stock, while disposing of high-value but slow- moving or seasonal stock as quickly as possible. By cutting its losses on the latter, a business can quickly replenish its working capital in order to buy stock that it can sell. Throughout the economic crisis, cost cutting was undoubtedly at the heart of most strategies, meaning that the majority of companies are now as lean as they can be without affecting performance. Moreover, long-term inventory management strategies are well supported by logistics theories and systems, meaning that the potential for further improvement is minimal.


Converting working capital investment into cash quickly is a strategy that larger companies employ to great effect – especially when negotiating favorable terms with suppliers and customers. Payment terms, which have always been an essential component of the business relationship, have become a battle ground as companies resorted to withholding payment during the downturn by unilaterally extending agreed payment times. Furthermore, extending payment terms dries up liquidity and has a knock-on effect across the supply chain and the wider economy. Research by Bibby Financial Services puts the cost of chasing late payment for the small business community at £1.9 billion a year, while analysis by consulting firm REL concluded that businesses holding back payments to suppliers during 2009 resulted in up to $740 billion in cash being unnecessarily tied-up in working capital at the 1,000 largest public companies in the US.


Having the right processes and mechanisms in place to ensure long-term improvements in the health of the balance sheet and accurate and strong cash-flow forecasts entails making improvements in all of the underlying areas of working capital: inventory, cash, payables and receivables, and doing this consistently and sustainably.


Larger corporations tend to apply sophisticated strategies to manage and utilize their daily international cash reserves. That said, there is a ceiling to the potential returns realized from cash and money market instruments and lessons learned over the last few years show that relying on these liquid asset classes or stable interest rates is no longer a safe bet or a


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Withholding payment or extending payment terms is not a sustainable strategy and the room for enhancements in cash and inventory management is minimal. Indeed suppliers will only accept late payment for a limited amount of time before taking remedial action. Such an approach places greater strain on the already fragile customer-supplier interface. Focusing on the customer- supplier relationship and accounts receivable is the more sustainable model to optimize working capital on a long-term basis, strengthen the balance sheet, and keep cash flowing through a business and the wider economy.


Untapped opportunity


Addressing all of the underlying areas of working capital performance allows businesses to ensure that cash does not become tied-up unnecessarily and, when approached in the right way, significant improvements can be realized. However, accounts


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