Top 10 Mistakes in Working Capital Management
In a sluggish economy, working capital management is both a business necessity and a strategic tool. Stephen Payne, president of REL Consultancy Group, Americas, identifies ten common mistakes companies make when establishing working capital management programs:
- Believing that only the CFO can fix problems in working capital management.
- Engaging in efforts, such as delaying payment to suppliers or stepping up collection activities, to artificially boost quarterly or year-end metrics.
- Beating the "cash is king" drum internally and for Wall Street, but not linking executive compensation to cash flow and comprehensive capital metrics.
- Waiting for a business recovery before trying to improve working capital processes.
- Believing that ERP systems and other technologies are a silver bullet for improving working capital management.
- Failing to connect suppliers and customers throughout the enterprise to gain significant benefits for all companies involved.
- Delaying payments to suppliers as a tactic to improve cash flow before fully exploring ways in which the company could leverage its position to negotiate better terms or gain discounts for prompt payment.
- Reducing inventories without improving the overall supply chain process.
- Letting debt become overdue before identifying disputes and contacting customers to resolve them.
- Modeling the business around make-to-stock processes when the company has the capability of running in a make-to-order mode.
Rel Consultancy specializes in developing and implementing performance tracking and reporting tools. Mr. Payne's list of 10 top mistakes was published in the November 2002 issue of Business Finance Magazine.