Blog / Finance February 4, 2022

Analysts Report $1.3 Trillion Is Trapped In Working Capital

Effective cash management practices, including increased liquidity and cash on hand, helped organizations ease the blow of market volatility during the pandemic.

Courtney James

Effective cash management practices, including increased liquidity and cash on hand, helped organizations ease the blow of market volatility during the pandemic.

Effective cash management practices, including increased liquidity and cash on hand, helped organizations ease the blow of market volatility during the pandemic. Although businesses are looking ahead now, many are still persistently saving cash. A recent analysis by The Hackett Group identified a significant opportunity to further improve liquidity. This opportunity encourages business leaders to optimize their finance processes and release the nearly $1.3 trillion trapped in the working capital of US businesses. 

CEOs and CFOs can work together to bolster liquidity by concentrating on the three segments of working capital. Consider implementing the strategies below to help optimize your company’s working capital during the pandemic recovery period to ensure a successful future:

Accounts Receivable 

Of the companies studied by The Hackett Group, accounts receivable increased 11% while their days sales outstanding (DSO) decreased by 3%. To continue driving progress in accounts receivable, CFOs should: 

  • Enforce controls to monitor open accounts and risk. Take reasonable measures to collect payments and limit bad debt.
  • Improve visibility into the operations between order fulfillment and invoice disbursement. Promptly send buyers invoices to avoid backlogs in accounts receivable. 
  • Close accounts quickly by reinforcing the collection process and payment terms. Offer early payment discounts to buyers to incentivize faster payments and eliminate cash flow bottlenecks. 

Accounts Payable

Companies experienced a 15% increase in their accounts payable function, while days payables outstanding (DPO) improved by 4%. To continue driving progress in accounts payable, CFOs should: 

  • Leverage financial insights to track vendor performance and use billing data to negotiate contracts and payment terms.
  • Expand the supply network to mitigate the risk of disruption and pay vendor invoices earlier to help vendors avoid cash flow problems.
  • Eliminate wasted spending for immediate cash flow and accelerate invoice processing with real-time advanced AP automation software.

Inventory Management  

Inventories increased by 11% in 2021. Days inventory outstanding (DIO) remained flat while the cost of goods sold (COGS) grew. Inventory levels were influenced by material costs, product availability, and consumer demand. To continue driving progress in inventory management, CFOs should: 

  • Increase end-to-end visibility into first, second, and third-tier vendors and learn how vendors manage production and logistics to expose risks for disruption.
  • Prepare for demand fluctuation with spend planning tools to ensure the company has the resources to access the necessary inventory levels.  
  • Integrate cost and margin criteria into inventory-related decision-making.

With the current improvements to the cash conversion cycle, analysts say companies are going in the right direction. However, companies can still drive performance to buffer against remaining market instabilities and supply chain challenges. CFOs must continue to strictly monitor their financial health. Having a holistic view of company spending is critical for CFOs and finance teams to effectively manage cash flow and liquid capital.

Are you ready to strengthen cash flow and optimize working capital in your organization? Eliminate waste spending and access real-time data-driven finance insights by scheduling a demo with an OpenEnvoy expert today, visit https://openenvoy.com/contact-us/.

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