Corporate executives in the U.S. understand the importance of optimizing working capital but more than half of them have yet to implement a strategy to manage the day-to-day cash flow of their organizations, according to a new survey by Crowe Horwath LLP.
The consulting firm found that nearly a third (32%) of financial and senior executives at manufacturing and distribution companies believe optimizing working capital is “extremely important” to their company’s success over the next two years, and another 50% rate it as “very important.” The vast majority (88%) also believe improved working capital management would boost their company’s profitability.
Despite those beliefs, however, only 46% of the respondents had implemented a working capital plan — and 7% even said they had no intention of developing such a plan.
“Working capital management requires ongoing awareness and consistent, standardized practices throughout an organization,” Bart Kelly, principal at Crowe, said in the report. “That can only happen if senior leaders identify working capital management as a core objective.”
“Developing and implementing a strategic plan to optimize working capital is the first step in demonstrating that,” he added.
According to Crowe, about two-thirds of executives agree that such activities as accounts payable, accounts receivable, capital expenditures, raw materials inventory, and finished goods inventory meaningfully affect working capital management.
But the actual practice of managing those activities “leaves much to be desired,” the report said.
Among other things, Crowe faults sales, inventory, and operations planning, saying it remains a largely static process that is not updated frequently. As a result, sales plans, production schedules, inventory volumes, research and development project pipelines, and customer lead times often are out of date.
“While there are certainly external factors that can be attributed to working capital difficulties, companies do not consistently use available methods to better grasp their financial situation,” Kelly said. “Whether it’s minimizing process wastes and lowering inventories, or improving supply forecasting and fulfillment with customers and suppliers, this study reveals the delicate balance and cross-functional collaboration that executives must work to achieve.”