This article was very interesting to read and brought to my attention several issues. Following the world financial crisis, a common scenario in today’s business world sees organizations always struggling for capital. However, with the ability to better manage their internal policies and processes, organizations may discover that considerable cash flow can be unlocked while making significant difference between failure and survival.
The authors highlight six common mistakes that firms commonly make in managing their working capital. In my opinion some of them can be argued.
The first issue raised is managing to the income statement. Organizations are suggested not to manage to their income statement, as several important cost articles are not reported on it; in this scenario, managers are keen to tie capital up in stock and receivables. The presented example represents this point with the common volume discount. Managers should pay particular attention before buying more supply than they actually need in exchange of a discount, because often this move may result in more costs at the end. This concept can easily apply to all elements of the working capital. This idea was very well expressed with the example of the metal refining firm which decided to reduce its payment terms from 185 to 45 days. This provoked a decrease in sales, however, it enabled the firm to save 8 Million a year in less capital costs, compensating also for the decrease in transactions.
I think this method should be carefully analyzed, I do not agree with the “one method fits for all” kind of approach. I believe that this approach may be valid according to the situation. I reckon that the most valuable clients should entitle to some flexibility, although in some cases, reducing all of a sudden payment terms may impact on the firm flexibility. On the other hand, this approach may resolve issues with those customers that constantly pay late....