Working Capital Management
Strategies for Improving Working Capital Management
by Dorothy Rule, Director and Global Head of Liquidity and Investments, Citigroup Global Transaction Services n 2004, treasurers worldwide continue to strive to manage working capital more efficiently. They are under pressure to reduce Days Sales Outstanding, to measure Days Payable Outstanding, and to find alternatives for enhancing yield management due to record low interest rates. Other factors are impacting corporate treasurers as well. Corporate governance initiatives such as SarbanesOxley are increasing the treasurer’s need for access and visibility to accounts around the world. The continuous rollout of Enterprise Resource Planning (ERP) systems worldwide is to some degree providing the needed increased visibility of accounts, as well as greater control and a single point for information retrieval on a real-time basis. Finally, the trend to gain efficiencies through treasury centralisation continues. The leaders in treasury and cash management have discovered that regional and global liquidity management are very effective working capital tools. Some are also discovering that newer tools such as Electronic Invoice Presentment and Payment (EIPP) and even Continuous Linked Settlement (CLS) can improve working capital management as well. These treasurers are developing effective strategies – sometimes using liquidity services, EIPP and CLS in innovative ways – to meet their own corporation’s unique needs.
solutions can be linked to other core cash capabilities – such as payables and receivables – enabling corporations to optimise their funds flows end-to-end, free up working capital, and maximise investment returns while minimising overdraft expense. Debit and credit positions are offset globally, reducing the impact typically caused by overnight overdrafts. The importance of real-time information integration With today’s technology, treasurers can view and manage their cash positions globally on a real-time or close to realtime basis. They know what their positions are earlier in the day and earlier in their cash cycle. Bank reporting systems, as well as accounts receivable and ERP systems, all establish real-time positions over the course of the day and provide improved forecasting accuracy. Treasurers can project what their net positions are going to be and make earlier more precise investments of excess funds (and realise better returns) or manage a least cost method of acquiring funds if their net position is going to be short. By virtue of earlier, better information, they can decide whether to draw down their working capital line, use a credit line, or redeem some of their invested positions. Contrasting approaches to maximising liquidity Some corporations are still leaving millions of dollars in time deposits earning minimal interest while others are concentrating dollars globally and investing them in vehicles such as structured alternatives to realise higher returns.
overseas locations and invests them in special funds managed by Citigroup. Before this liquidity structure was established, Motorola and its subsidiaries held cash in bank accounts and overnight investment vehicles around the world, and had more than 100 financial managers managing the investments. Motorola estimated half of its overseas investments were generating less than optimal returns. The solution enables financial managers around the world to pool and invest their dollar-denominated cash balances in private money market funds. Each entity still retains owner-ship of its investment thereby eliminating tax issues. The money market funds are managed according to Motorola’s guidelines that include slightly longer maturities than usual for most money market funds. To date, the funds have yielded 50 basis points over the company’s benchmark, three month LIBOR, boosting interest income by more than US$ 11 million per year. Motorola’s overseas managers...
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