How Finance Masters Work Their Capital
Anders Liu-Lindberg
Leading advisor to senior Finance and FP&A leaders on creating impact through business partnering | Interim | VP Finance | Business Finance
This article is co-written by Lola Castillo Garcia and Anders Liu-Lindberg
Having access to capital is typically a prerequisite for doing business and having to go ask someone for it whether it’s the bank or investors costs a lot of money. So, it’s much better to manage the capital you already have available within the company. Often capital is not just standing idle in your bank account but rather it’s out “working” in your company buying supplies from vendors, given as credit to customers, etc. i.e. it’s your working capital. This topic has been covered countless times through the ages and naturally, it’s also a topic for the Finance Master series where we’ll look at how Finance Masters manage to run a tight ship when it comes to working capital ensuring they maximize their funds available and minimize the need for external funding.
To cover this topic, I have invited Lola Castillo Garcia, who’s an all-around finance professional from Spain who with more than 20 years of professional experience in Finance, Controlling, HHRR and IT to share her views on working capital. Lola wants to become the Finance Master that small and medium-sized companies need.
Before going into how Finance Masters master working capital let’s just remind us about the official definition.
Working Capital = Current Assets – Current Liabilities
Then depending on the company and industry, you will see various asset and liability types included in the measure.
To manage working capital, you need to master multiple disciplines
Many of the disciplines involved in working capital management has already been covered in the Finance Master series through the articles “How Do You Master Travel Expenses”, “How Finance Masters Collect Their Money”, “Finance Masters Last Resort To Get Paid” and “To Pay Or Not To Pay A Finance Masters Dilemma” but in this article we will cover some more overall considerations on how to manage your working capital effectively. Essentially, we see five considerations for finance functions to keep in mind when managing working capital.
- Know the value added of each business process and how it impacts working capital.
- Know which levers managers have, to impact each business process and make an impact on working capital.
- Manage the information flow from each lever and put on the table the inefficiencies in the supply chain, inventory, receivables, and payables process and come with suggestions on how to improve efficiency.
- Balance the use external funds in accordance with working capital needs.
- Know when to cut managers some slack on working capital to deliver results
In short, if you don’t know how the business works you can’t manage your working capital properly. Knowing your business you will be able to evaluate whether or not turning one lever will not only result in a working capital improvement but also that it either leave the business as is or even improves it. One example could be that to improve your working capital you stop doing business with customers that never pay on time and when factoring in the cost of capital they’re actually not profitable. Then you both improve your working capital and improve the bottom-line. It doesn’t have to be an either or i.e. you just tell the business to stop doing business with customers that don’t pay on time regardless of if the company makes money on them or not.
Finance Masters go beyond and eliminate the need to manage working capital
It sounds like a pipe dream but it’s actually not that unreal. In the previous Finance Master article “To Pay Or Not To Pay A Finance Masters Dilemma” it has already been described how companies through payment automation can pay their vendors almost immediately. You could imagine it becoming even more streamlined using smart contracts powered by Blockchain technology. The smart contracts would be programmed to auto-execute financial processes like payments and accounting minimizing everyone’s balance sheet and having funds transferred within very short time frames. No more calling up customers to ask when they’re going to pay. No more angry vendors shouting at you because your procure-to-pay process is a mess, no more over- or understocking but an inventory of just the materials you need. It’s not far-fetched but reality and that’s how true Finance Masters manage their working capital.
Technology helps us to change the way we work by making processes be more efficient, but Finance Masters provide the knowledge to improve the business and process as well.
You're the Master and your input is needed!
The Finance Master series is looking for your input as well. What advice do you have when it comes to working capital management? What good practices would you recommend for someone looking to minimize the cash held up in working capital? Have you ever experienced how you needed to go out and get external funding because you had too much cash tied up in working capital? We encourage you to add it all in the commentary field and Anders will update the article as they tick in. If you disagree to some of the statements in this article what would you do instead? Finally, if you want to be a part of the Finance Master series then send Anders a message or write in the comment section with a topic you think that you master.
This is the ninth installment in the new Finance Master series and you can read the kick-off article here and previous installments below. Let us know what you think of it by liking, commenting and sharing so we can spread the Finance Master message to all finance professionals. You can follow Anders on Twitter for continuous updates about what’s happening in the finance function.
How Do You Master Travel Expenses?
Don't Fear The Masters Of Internal Audit
How Finance Masters Collect Their Money
Do You Model Off Against The Masters Of Financial Modelling?
Finance Masters's Last Resort To Get Paid
To Pay Or Not To Pay A Finance Masters Dilemma
How Finance Masters Win With BI & Analytics
How Finance Masters Champion Month-End Close
Anders encourages you to take a tour of his old posts on finance transformation and not least “Introducing The Finance Transformation Nine Box” which is really the starting point for the transformation. Finally, you should join the Finance Business Partner Forum where we will continue to discuss this topic.
Finance Transformation Should Be All About… People
How To Help Your CFO Transform Finance
There Is A New Kind Of CFO Needed In Town
The CFOs Roadmap To Transforming Finance
How Finance People Can Be More Successful
The New Career Path For Finance Professionals
Anders Liu-Lindberg is the Head of Global Finance PMO for Maersk Transport & Logistics and is working with the transformation of Finance and business daily. I have participated in several transformation processes such as a (business) finance transformation at Maersk Line, going Beyond Budgeting at Maersk Drilling and transformed a finance team from Bean-counters to Business Partners. I would love the chance to collaborate with you on your own transformation processes to help you stay out of disruption. Don’t be shy! Let’s get in touch and start helping each other.
Global Top 25 Operational Excellence Thought Leader 2024 | Senior Platform Product Owner @ Maersk | Lean Six Sigma | Agile Practitioner | Global Strategy Partner | PEX Network Advisory Board Member | Ex-Genpact | Ex-GE
6 年Hi Anders and Lola, well rounded article with quite a good focus on upstream business impacting downstream (Finance - Cash flow). I would like to add here two points: 1. Lot of times we see Invoices are not paid because they are incorrect (price, quantity, payer mis-match etc.) which leads to uncollected debt and creates inefficiencies in the value chain. We should also look at Accuracy of Contracts vis-a-vis volumes, often Sales is busy generating volumes and leaves quality of contract filling at bay. There should be an a clearly defined operating model to check accuracy and a loop process to ensure preventive controls are in place, I believe Finance Masters can do that with data driven insights and business partnering. 2. Customer Master Data in another key area often neglected, I call it a "KYC"? (Know Your Customer) concept where by each person in the organization owing the customer (be it Sales, Key Client Rep, Finance associate) should at all time know their customers (like email, contact details, their Accounts Payable Reps..) to ensure good flow of communication with customers and proactively identify issues causing slow cash flow at customer end and helps define good strategies to collect outstanding debt. Hope these above points make it to the tick !
Leader of a global network creating engaged & influential finance professionals & leaders who solve meaningful problems for organisations in this digital age.
7 年Thanks Anders and Lola for raising the topic of #workingcapitalmanagement, it's an area for finance masters to add tremendous value, because generally #1. There's always opportunity to do it better even if we think we're already doing well at it I'm yet to find a company where we didn't unlock value because of #2; #2 as you say it represents a great window into the end to end transactions of the business, as we learn we unlock more trapped working capital; and #3 it's a way of financing #sustainedprofitablegrowth which a lot of SME owners desire. I'd also add that just because a company is profitable & growing if its working capital is not managed it's at risk of "growing out of business" sharing link https://www.dhirubhai.net/pulse/you-growing-out-business-andrew-codd-cgma-mba/
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7 年WWW.IEEINVEST.COM CO.IEE GROUP
Vice President Controlling Industrial Region Americas
7 年Another great article Anders. I think it's important to not only think about the value add but also the win-win. Using customer financing solutions is one example. For instance, using leasing and team up with a good financing partner can boost sales, improve your DSO, and create a win-win for all 3 partners involved. Another effective way to create a positive solution and build trus would be to use QCs (Quantity Contracts) in your Supply Chain. That will secure supply, cut lead time, and reduce your cost. At the same time it will help the suppliers. I'm not sure about the use of a supplier portal but I believe it could potentially drive better working capital management as well. It should help the suppliers and the manufacturing entities.