New Year’s cash flow wish

Some companies focus on improving or even manipulating certain performance indicators when the quarter changes, and most of all when the financial year changes. One typical example is accounts payable: Selected or all invoices due near the year-end are pushed to the next financial year, i.e., a company does not pay to its suppliers as promised, but later, to improve working capital and cash flow related metrics.

To sustainably improve working capital and cash flow performance, that is not the way to go. To achieve permanent step-change, a company must focus on improving many of the core processes and in the end, create cash focused culture.

How to improve cash flow management permanently?

Can one utilize the change of year in order to get things rolling? To get people to change their ways of working. And thinking.

The change of the year is an opportunity to create the needed urgency for change. People need motivation, and this is as good of a chance as it gets without acute cash crisis, which hopefully is not the path we are directed currently.

The idea is that we motivate all the key personnel to take extra needed activities because we have to do it now to get financial figures to needed levels. And the keyword here is now. Not after a couple of months of careful planning, but we do it now. Maybe we do not get everything 100% correct, but we get the momentum going in the right direction. Then, we improve everything as we go.

If we are able to do that successfully, then the harder part follows. In a best-case scenario, we turn these unusual ways of working to our basic processes - daily activities. That way, we improve cash flow management permanently. That’s, of course, not easy, but why not begin the journey today?

5 ideas to improve working capital

These ideas work when focusing on one point in time, as well as in creating standard processes in the future:

  1. Invoicing delays equal capital tied for too long. When invoicing is delayed until the end of November, because of lazy reporting of work or delays related to financial processes, money from invoices with typical 30 days, net payment terms will be in practice received after year’s change.

  2. Collection efforts should be directed towards the biggest buck. Listing the most important invoices by monetary value and verifying well before due date that our company has fulfilled all the responsibilities is crucial – we can contact the customer before the payment date and give her absolutely no reason not to pay us in time within this financial year.

  3. It is also worthwhile to analyze slow-turning inventory. We might decide to offer selected batches of products to our customers before year-end, although their actual demand is quite not yet acute. To receive the cash flow immediately, we might need to prepare selected motivational elements to our sales team and our customers.

  4. Sourcing should focus on big purchasing batches planned towards the end of the year. Suppliers’ sales teams are trying to fulfill their sales budgets and want to negotiate when needed. Why not go for longer payment terms for these purchases – and possibly permanently for this cooperation?

  5. The payment process must also be tightly controlled. Many times, suppliers ask for payments before the due date, and for various reasons, their requests might be approved. At year-end, we have to make sure, we also optimize our cash flow situation.

We can utilize year’s change as a motivational element in optimizing working capital now, and permanently.

Here's an excellent hands-on eBook for you how to execute a working capital optimization project. Download the eBook by clicking the image below: 

How to execute a working capital optimization project


Psst: Similar ideas in Finnish here.

Authors

Mikko Myllys is Capacent's sales and marketing director in Finland. Mikko holds over 15 years of experience in working capital management, management consulting and change consulting from various industries.

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