Working capital optimisation

Five key steps to optimising your cash flows

Matt Crane Matt Crane

In our previous article, we outlined the importance of effective working capital management and the opportunity to improve cash flow that may exist for many Thai businesses.

Effective cash management is a critical success factor for any business. To fund growth, invest in new infrastructure or mitigate short term downturns, having strong visibility and control of day-to-day cash is a must.

When short term funding requirements do arise, debt is typically the first solution sought out by businesses in Thailand, rather than understanding and identifying whether better opportunities exist through optimising the balance sheet. Statistics published by the Bank of Thailand show that total corporate loans have risen 5.4% year on year, indicating that debt is increasingly being used as a source of funding growth.

Debt is without doubt an important component of any organisation’s capital structure and can be the right solution in many situations, but a consistent focus on optimising your operations and day-to-day cash requirements can deliver benefits above and beyond short-term cash flow.

From our experience of working with a wide variety of businesses, we’ve outlined below the five key considerations to make when seeking to optimise working capital and embed effective cash management:

  1. Make working capital a strategic priority 

    If the board and senior management are not giving the right level of focus and importance to working capital and cash flow, then it is very that unlikely those in the organisation who can influence cash on a day-to-day basis will do so either. Ensuring that working capital is a visible, and widely communicated, strategic priority is an essential step. For example, senior management should meet at least once a month (in some cases weekly) to discuss working capital management.

  2. Understand what good looks like

    Performance varies by sector, business size and the market you operate in, but understanding what optimal working capital looks like within these constraints is critical to enabling improvement.

    Businesses will point to process restrictions or the unnegotiable relationships with customers/suppliers as reasons for current levels of working capital, without truly challenging the structure of end to end processes. Some of these reasons will be valid, but without knowing what the optimal level is for your business, you can never truly know if you are effectively managing your cash. Use publicly available information to understand the performance of your peers, customers and suppliers.

  3. Optimise process and controls

    Adopting simple best practice processes and controls, such as standard payment processes, exception processes and formalised collections procedures, will deliver immediate improvements in working capital, and instil a cash focus in your standard operating procedures.

    For example, ensuring standard payment terms are agreed and communicated, with exceptions approved and monitored, is an essential process for effectively managing working capital and should be embedded in both commercial and procurement policies.

  4. Develop and embed operational level metrics

    Businesses that have a reasonable handle on working capital will be regularly monitoring month end metrics such as days sales outstanding, days payables outstanding, and days inventory outstanding.

    These are a minimum requirement, but should be complemented by operational metrics that allow regular tracking of working capital performance, in a way that can be understood by those in the business who can influence them. Metrics such as average payment terms and % of credit notes issued are simple to measure and track.

  5. Use technology enablers

    With the ever-increasing pace of technology development, there are many new opportunities to push the boundaries of best practice and drive cash improvements through the use of technology enablers. Solutions such as supply chain finance, RPA and real time inventory management software should be considered where wider benefits support the required investment.

These are just five considerations relevant to most organisations, but there will be many more levers specific to your industry and current situation. In our next Insights piece, we will share the results of our analysis into the working capital trends of Thai businesses, allowing you to benchmark your performance against others in your sector.