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Enhance your business with working capital management best practices


Strategic working capital management is different than it was only five years ago. While some companies view it as basic blocking and tackling, others embrace best practices and leverage technology to make the most of this fundamental business responsibility.

Working capital management focuses on four primary objectives:

  1. Optimizing cash: Ensuring cash is deployed efficiently by lean and automated processes
  2. Maximizing cash: Maximizing cash by shortening day sales outstanding (DSO) and extending days payable outstanding (DPO) to meet or exceed benchmarks
  3. Visibility and access to cash: Gaining visibility and access to cash through optimal liquidity structure and forecasting
  4. Protecting cash: Preserving cash by ensuring risk management policies and processes are in place

Taking a holistic approach

Effective working capital management employs a comprehensive methodology, starting with these fundamentals:

  • Policies: Ensure corporate-wide policies are written, communicated and audited
  • Technology: Leverage your ERP system and bank technology to attain best-in-class levels of automation
  • Organization: Centralize functions such as credit, order entry, cash application, procurement and payment execution to a corporate level or shared service
  • Process: Ensure streamlined, automated processes are in place, with tight controls to mitigate the risk of fraud and reduce the risk of errors

Order-to-cash cycle

For each phase in the order-to-cash cycle, there are steps that can be taken to gain efficiencies, mitigate risk and identify problems. Following are some highlights:

Customer master

Centralized credit and collections, with standardized policies and procedures that are audited. Don’t offer early payment discounts, but take them from vendors if they are offered. Automate credit review and credit limit decisions based on rules established in ERP system.

Order management

Don’t use sales people to put in orders, as it may not be the best use of their time. Centralize order entry to surface problems and measure order-entry accuracy to uncover potential problems due to manual entry.

Shipping and fulfillment

Use your ERP system to automate as much as possible, including freight costs. For intercompany buying and selling, ensure transfer pricing methodology is reviewed annually and takes into consideration where cash may be accumulating

Invoice creation

Automate the creation of an invoice upon shipment of goods. Take a lot of paper out of process by making the investment in electronic digital invoicing (EDI).


Centralized collections group, with global policy and procedures that are audited periodically. Focus on managing exceptions, rather than the entire process. Look at the corporate trade exchange (CTX) to go from checks to electronic collections. Nuisance check collections should be managed by remote deposit for quickest access and availability of the cash,

Cash applications — Reconciliation/Reporting

Allow for straight-through processing based on electronic invoicing, collecting, application and reconciliation. If you have disputes, do a root-cause analysis. If you can automate high-volume, low-income expense, do so. Leverage the company website to allow customers to view order status, outstanding invoices and make payments.

Procure-to-pay cycle

Following are highlights of best practices in this cycle:

Vender master data

Centralize the vendor master: Get information from vendors on banks and how, where they want to get paid. Protect this data by limiting access and the ability to make changes. Banks often offer systems where they hold all of that information.

RFP/contract negotiation

Centralized procurement-negotiated global contracts to capture volume pricing, better terms and early pay discounts. Question how many vendors in each category you really need to have. Tie payment terms to payment type to encourage electronic payments over checks.

Requisition creation

Purchase orders should be created and delivered electronically to vendors. Due date should auto-populate based on match of what was ordered, what was received and what was invoiced.

Invoice processing

Automated three-way matching is functionality that most ERP systems offer. Fully automated, best-in-class firms can process invoices within three days.

Payment execution

With the growth in ACH and card usage, remove all checks and paper-based transmissions and offer electronic payment and electronic remittance information. Outsource any check printing to reduce costs and protect against fraud. Leverage early pay discount; use ERP to measure terms and see how often you take advantage of the discounts. 


Manage the exceptions. Track how long it takes to close the books (what is causing any delays; will automation lead to faster accounting close and reduce costs).

Fraud prevention for checks and online payment

When it comes to protecting a company’s cash, it should be remembered that 60 percent of organizations are exposed to actual or attempted payment fraud every year. A typical loss incurred due to payment fraud is about $23,000.

If payments are made by check, accounts should be reconciled on a daily basis. Internal duties for financial activities should be segregated. In general, personnel should be fraud-focused on inquiries from banks and institutions regarding legitimacy of checks. Suspicious activities should be elevated to the management team. For added security, management may want to consider migration from check payments to electronic payment products or consider outsourcing check processing to secured vendor.

If hackers and fraudsters gain access to a company’s computer system, they can harvest access credentials; internal systems, financial systems, email; collect information on business contacts; and initiate email to accounts payable and ask the recipient to process a payment to pay a falsified invoice.

To prevent online fraud, all company users should learn to recognize phishing scams and know to not open file attachments or click links in suspicious emails. Anti-virus software and system patches should be kept up to date. Users should be cautious when visiting Internet sites that are not trusted and used for business purposes. User names and passwords should never be shared and companies should avoid using automatic log-in features that save them.

Transforming the treasury and finance functions

By following these best practices, the treasury and finance functions can be transformed from transactional processors making payments and moving cash to advisors on risk and investments to forward-looking strategists.

The opportunities for strategic working capital management can be found throughout an organization. Incorporating lean finance concepts can lower costs. Reviewing policies and ensuring tight controls are in place can prevent fraud. Building better, automated processes rather than replicating old processes can result in greater efficiency. Capturing cost synergies between companies can allow a merger or acquisition to realize value sooner than it might have otherwise.

Overall, the best practices of working capital management revolve around four basic trends:

  • Centralization: Invoice processing, procurement, credit, collections and cash applications
  • Standardization: One policy, process and technology across all groups and subgroups
  • Automation: Remove manual steps, focus on technology enablement
  • “Electronification”: Remove paper-based transmissions, focus on host-to-host EDI

Properly implemented and maintained, the efficiencies gained through effective working capital management can lead to cost savings for the organization. It can also result in better data management, which will provide company executives with more accurate and timely reporting for better-informed decision-making. With fewer errors and tighter controls, a comprehensive approach can help lower the rate of errors and mitigate the risk of fraud.

This article is based on the discussions and presentations shared at a CFO Club Chicago meeting. Many thanks to the contributors from Bank of America Merrill Lynch representatives Janet Burt, Janine Durbin and Sara DeCoste for their presentations.

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