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Seven questions to help you develop a working capital optimization strategy

This is the first in a series of articles on optimizing working capital.

Working capital - it's the financial metric that measures the day-to-day operating liquidity available to your business - and a key measure of your company's short-term, financial health. The recent global financial crises and resulting liquidity shortage have highlighted the importance of tightly managing working capital, with many companies looking to source working capital improvements internally.

Before the economic downturn, many companies focused on expediting the collection and posting of their own cash to improve working capital. With substantial gains already realized on the receivables front, companies have now shifted their focus to the payables side. Many initiatives are taking place, including extending supplier terms in a targeted manner; achieving outsized, risk-free returns by providing liquidity options to non-strategic suppliers; and reducing supply chain risk by ensuring that the most strategic suppliers have access to competitively priced financing.

Here are some questions to consider as you look to optimize working capital for your organization:

1. Have you benchmarked your working capital performance against your peer group? A rigorous analysis of working capital metrics, such as Days Payables Outstanding (DPO), can give you significant insight into the competitive dynamics within your industry group and enable you to quantify the potential opportunity of moving to median or best-in-class performance.
2. Do you have a working capital optimization strategy for each segment of your supply base? Not all suppliers are equal. Leverage and price sensitivity vary substantially depending on the supplier's strategic importance and volume with your organization. Different strategies and solutions may be warranted for each supplier segment.
3. Do you offer a liquidity option to each supplier segment that fits within your optimization objectives? Best practice is to offer suppliers a liquidity option on every dollar of spend. Options include offering Purchasing Card settlement (often with revenue sharing) for non-strategic suppliers, supply chain financing (often with terms extension) for strategic suppliers and early payment discounts (with high rates of return ranging from 18 to 36 percent) for all suppliers in between.
4. Have you analyzed the impact automation tools can play in executing your working capital strategies? Regardless of the strategy, automation is critical to scaling its execution. As much time and resources should be devoted to execution as is spent on strategy development. Automation tools should be leveraged for everything from supplier recruitment, electronic invoice receipt and terms extension to supplier visibility, supplier early payment requests and ACH or Card settlement.
5. Do you have an integrated strategy across all solutions from a single provider? Using one provider who can help you develop and execute an end-to-end strategy across your entire supply chain will provide the greatest opportunity to integrate solutions across supplier segments. It will also help avoid conflicts where strategies from two providers may overlap.
6. Are you coordinated in your objectives and approach within your own organization? To exceed your working capital goals, coordination is required across Treasury, procurement, finance and information technology. Today's best-in-class companies are building working capital objectives into the performance goals of each area to ensure alignment across their organizations.
7. Have you received a customized benchmarking and working capital analysis for your organization? There are enormous cash flow and bottom line benefits to be gained from an independent assessment of your organization against best practices, benchmark data and latest trends in working capital optimization. Working through your banker or sales officer, J.P. Morgan's Treasury Advisory Solutions team can help you develop a benchmarking assessment and recommendation for your organization.

J.P. Morgan

Mercredi 2 Juin 2010

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