Freeing up working capital requires knowing the entire cash picture

Dan Ginsberg, Managing Director of Private Equity at SGS Maine Pointe, recommends a Triple Impact approach to freeing up working capital, a departure from focusing on a single area such as receivables or inventory. In a recent interview at Strategic CFO360, he explains how the Triple Impact approach, coupled with automation, gives companies visibility into their entire cash picture, enabling them to free up working capital regardless of how the economy changes.

While inventory issues have become more prominent following the pandemic, he states that they “should be balanced with optimization of both payables and receivables in order to achieve a complete cash flow optimization strategy.” He notes that in addition to excess inventory, which ties up cash in warehoused and unsold goods, companies are facing problems related to shortages, quality, and price increases, which also affect cash flow.

As a first step to solving these problems, Ginsberg recommends aligning sales with inventory, which gives management “a better picture of what needs to be fulfilled at any given time. This practice, often rooted in automation and analytics, will eliminate the mismatch that often occurs between sales and inventory, thereby avoiding many of these issues.”

Automation and digitalization triggers can also help free up cash by optimizing payment cycles, the management of disputes, billing, and collections. Finally, the payables strategy requires a strategic negotiating approach toward price discounts and payment terms. In all three approaches to increasing cash flow, automation increases accuracy and reduces errors. 

When measuring the impact of cash flow in the current economic environment, Ginsberg notes that “Interest rates have effectively taken the topic of working capital out of the CFO’s office and put it on the priority list companywide.” Higher financing costs and fewer sources of financing place mean that the entire organization has to share the burden of finding and managing cash.

The Triple Impact strategy and the organization-wide participation in cash liquidity and cash management practices will strengthen a company to meet future shifts in the economy. With better visibility and control over their cash flow picture, Ginsberg says, they will shift from short-term reactions to long-term viability.