Working capital: From functional to fundamental

What distinguishes a competent corporate treasurer from a true master? It is a profound question. If there is an answer it would have the power to improve the way finance departments are run, and have implications for entrepreneurs and senior managers too.

In fact there is a straightforward distinction. Basic treasurers stay in their own departments. They think about products and tools. They run projects to upgrade their finance software to faster, broader packages. They use finance products to boost cash flow, such as invoice discounting. And they strive to improve contract terms. All of which are valid.

But in order to evolve to the next level, a shift needs to occur. The focus must move to a new mindset.

“Nirvana is reached when the company is generating working capital improvement naturally,” says Ian Fleming, managing director of Working Capital Advisory at HSBC UK. “It isn’t a one-off project, which stops when it hits goals or runs out of time. The real end-point is where you have an organisation with the right disciplines embedded within it, adapting perpetually. There is a continuous search for improvement.”

Mr Fleming adds: “I can tell you, it is pretty rare to find this.”

And how do you achieve this state? Fortunately Mr Fleming has some concrete advice.

The treasurer must be perpetually thinking of new ways to highlight the need for better working capital management

It starts by realising that the treasury can’t simply focus on its own affairs. It needs to educate all departments in good working capital management. “I make people an offer,” he says. “I say I’ll buy their product priced at £100 for £120. Then I ask if my proposal is a generous one. They say, ‘yes’. Then I mention that I’ll pay them in 50 years. Ah! Not such a great deal.”

The point is that transactions are not good or bad in terms of pure cash figures. They are always tied to a timeline. It is the role of the treasurer to make sure all executives grasp this concept.


Then comes the idea of performance. What does the word mean? “If you don’t benchmark against your peers, you won’t really know. One of the first things I advise companies do is to study performance against peers,” says Mr Fleming.

It is a common error to suppose there is a standard method. Only by understanding the nature of work the business is engaged in, the margin levels, the growth levels and the economic conditions the company will experience, can a verdict be given on working capital levels. An elite treasurer will factor in all these unique variables.

Comparisons must be done with companies with a comparable business model. Different sourcing or selling strategies may have a significant effect on working capital metrics. Treasurers need to be alert to point out potential glitches in benchmarking. Companies that are using financial products such as invoice discounting will have different working capital profiles.


When there is clarity in benchmarking, then lessons can be drawn. Mr Fleming says: “You can start by looking at the basic metrics, such as days inventory outstanding, days payable outstanding, days sales outstanding and a combination of those, which is the cash conversion cycle.”

Then the perspective widens. “Equally, there is a broader context,” he says. “Things such as margin – how much flexibility does the business have? It is clear that with a smaller margin, the more important it is to use working capital to manage the free cash flow you are driving from the business.”

Business with a more generous cash situation may need a renewed focus. Mr Fleming warns: “To some extent the larger the cash pile, the less inclined that company will be to have a cash culture. If you are sitting on a cash pile, arguing that working capital can be improved and used can just get a shrug. Other executives will ask ‘What for?’”



A neat trick when benchmarking is to segment a business by sectors or geographies. This allows for more accurate and informative analysis.

Also don’t just compare with competitors. It can be helpful to look at your top buyers and suppliers too. Look at their days payable outstanding and days sales outstanding. This information can be leveraged when negotiating with these partners. How do your current terms compare? Are your payment terms significantly shorter than your suppliers’.

Companies hungry for liquidity may be anxious to seal quick deals, with quicker payment terms, for a reduced price. This is just one reason why treasurers will find it useful to conduct benchmarking regularly, not merely when warning lights start to flash.


Treasurers must investigate incentives. If executives are not rewarded or evaluated on their approach to working capital, their focus may wander. “If the incentives are wrong, you will stay as an organisation which only improves working capital practices when a crisis occurs or there is a top-down directive. Fix incentives, fix key performance indicators and you’ll move to a state of constant improvement,” Mr Fleming says.

The treasurer must be perpetually thinking of new ways to highlight the need for better working capital management. He adds: “One technique is to imagine where you would find cash if you wanted to expand into another sector. Can you? What can you unlock from your balance sheet?”

Outstanding treasurers are visible outside their departments, driving improvements in every corner of their companies. And they are not afraid to bring in outside help. “Suppliers and buyers will need to negotiate. A third party can bring in products and the ability to resolve differing objectives. A bank or financial institution can add value to that process,” he says.

Above all the treasurer takes responsibility for ensuring the whole company’s mentality. It even extends beyond the firm’s borders. “Treasurers ought to be looking at their eco-system of suppliers, even to third-tier suppliers, to make sure it is optimised and stable,” says Mr Fleming.

This conception of a corporate treasurer is a long way away from the narrow, restricted spreadsheet-fixated character found in the text books. “You need to get working capital management into the DNA of the business,” he urges.

It is quite a challenge. But one with huge rewards for anyone prepared to take it on.



Bart Ras, global head of business development, Global Trade and Receivable Finance HSBC

Q: Most corporate treasurers stay in their own department. What is wrong with that?

A: An effective corporate treasurer can be an agent of change in sales and procurement. I will go further. The treasurer must get involved in those departments to change their mindsets. At first the reaction of sales and procurement teams might be, “Are you lost?”, but when the treasurer demonstrates his value, the questions will stop.

Q: What can treasurers bring to sales and procurement?

A: They can bring a new perspective. In the traditional model, sales guys want to sell more, and procurement teams want to pay less. It seems contradictory.  A treasurer can help both parties in the transaction see that their goals are not so mutually exclusive. For example, it may not be true that the sales teams want to sell at a higher price. They might want to sell at a larger volume. There may be an issue with payment terms. The treasurer can help both sides negotiate.

Q: Can all firms benefit?

A:  I think the involvement is compulsory. In a company, both sales and procurement need to understand the needs of the finance department in order to know what the company is trying to achieve. You can’t start to think about pursuing external goals without having everything aligned internally. The treasurer can ensure companies have that internal alignment.

Key areas for treasurers in 2016

Q: What about other departments?

A: The treasurer can have a huge impact on supply chains. There is no doubt that supply chains can offer a genuine competitive advantage. Treasurers can bring their insight into issues such as just-in-time delivery. Companies ordering goods from China are now looking to have back-up supply chains from Turkey or even close to home. Treasurers can help the supply chain team develop a strategy that improves customer service, optimises inventory and optimizing working capital.

Q: What advice do you have for treasurers?

A: You need to engage with colleagues across your company. It is no coincidence that successful companies have treasurers who have broken down the silo mentality. It really is a pre-condition for strong business performance.