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Real Business : Issue 1 2010
cpacareers.com.au ISTOCKPHOTO e overall amount of liquid cash stuck in the financial supply chain is almost $30 BILLION in Australia. NO COMPANY CAN AFFORD TO abandon its growth plans just because the economy slows down. So CFOs everywhere face the same basic challenge -- financing sales in the face of decreasing demand. Worse, bear markets increase the cost of capital, which makes it more important to figure out what price it is worth paying to subsidise revenue growth and how aggressively to do so. In today s hotly competitive global marketplace, where product cycles are ever shorter and pricing power often non-existent, a company that is not growing efficiently risks not growing at all. We all know that money trapped in working capital is money not being used to grow the company. And, for most CFOs, squeezing as much working capital as they can out of the balance sheet is looking like a better option than looking to other sources of funding, especially when the ferocity of this latest downturn has caused liquidity to dry up. e truth is that Australia s biggest companies are wasting bucketloads of cash. e overall amount of liquid cash that gets stuck in the financial supply chain -- receivables, payables and inventory -- is almost $30 billion, according to the consultants who sur vey Australian companies. e trouble is that the traditional methods companies use to mine working capital -- calling in overdue payments, stretching out their own and relentlessly paring down inventories -- can lead to a gigantic, circular squeeze where no one wins. But there is a way out. By viewing cash-conversion efficiency as a true business driver and being a little more creative, CFOs can reduce their working capital and improve cashflow without alienating customers or stringing out suppliers. logistics or sales orders -- which are important. So the measures for working capital are very fragmented and, ultimately, the board and senior management must get involved. Typically, there is a massive conflict between sales and finance. Sales people want to build market share and the best way to do that is to offer good credit terms and competitive prices. e CFO, on the other hand, is concerned about controlling the cost of capital. Post-crisis, the whole marketplace is constantly expecting that capital be managed in a disciplined way and, clearly, one way to do that is through better and more effective working capital management. Rating agencies, too, are including cash management in their rating criteria, forcing the analysts to really push companies on free cashflow, especially those investment-grade companies that have international investors. Fund managers and rating agencies have long said they want to know how companies manage their balance sheets to release cash because there is such a high price for not releasing cash out of the business and using it to pay down debt or for investment in those assets to generate better returns. Poorly managed companies absorb cash and limit their flexibility and then, when liquidity does dry up, they face far more difficulties. Better management is better liquidity management. FEATURE For more information, visit www.caltex.com www.orica.com www.amcor.com 19 By effectively co-ordinating the search for free cashflow and checking to see how it suits their overall strategic plan, company management can release millions of tied-up dollars and use them to finance acquisitions, fund new systems and marketing initiatives, pay down debt, reduce gearing to maintain their credit rating or buy back stock. Operating on the basis that since working capital is money you already own, it s a lot easier to tap into it than raise equity. Companies such as Caltex, Orica and Amcor have driven a significant amount of cash from their internal operations and used it in the most effective way possible, to finance acquisitions. ese companies view working capital or operational cash as just another financing method -- a third capital market, along with debt and equity. When a company knows how to optimise its own working capital, management is able to quickly generate cash from the acquired companies balance sheets. at means they can pay down the cost of the acquisitions more effectively and quickly. e first step in good working capital management is to understand the processes you ve got in place and decide whether they re achieving what they re supposed to. e next step is asking the people involved in those processes what s achievable before deciding on the appropriate measures. Doing all that is no easy task, especially when it comes to inventory and the supply chain. e problem is that the real driver of working capital optimisation lies beyond the reach of the finance department. e CFO only controls two out of three parts of the working capital. CFOs control billing and collections, receipting and treasury but not sales terms or contracts, order management,
Issue 2 2009
Issue 1 2012