Tips for Effectively Managing Working

Capital
1. Manage Procurement and Inventory

Prudent inventory management is an important factor in making the most of your

working capital. Excessive stocks can place a heavy burden on the cash resources of
any business. On the other hand, insufficient stock can result in lost sales and
damage to customer relations. When looking at inventory, it is important to
monitor what you buy, just as much as what you sell. The key challenge for
companies is to establish optimum stock levels and avoid driving up costs for
physical storage and insurance as well as wasting stock if it is time-sensitive. This
can be done by promoting better communication and forecasting between
departments.

If stock levels are unknown, then it is difficult to manage the optimum level and the
company risks experiencing a loss in sales, as a result of a shortfall in materials.
Periodic inventory checks are useful in monitoring levels of different types of stock
and alerting finance to any recurring overstock or understock issues.

It is extremely important to control what is purchased. Investment in procurement

automation can greatly boost working capital. A centralized procurement process
where each purchase requires authorization helps to prevent maverick spending by
ensuring that procurement staff are only permitted to order approved
products/services from preferred vendors.

2. Pay vendors on time

Enforcing payment discipline should be a key part of your payables process.
Analysis of working capital levels shows that the biggest improvement comes from
improved payables performance and reduced days payable outstanding (DPO).
Extending DPO should no longer be considered a viable option, particularly with
many vendors having been affected by the pandemic and therefore unlikely to offer
the option.

Companies that pay on time develop better relationships with their vendors and
are in a stronger position to negotiate better deals, payment terms, and discounts.
It seems like a counter-intuitive way of maintaining a steady level of working capital,
but if you keep your vendors happy, it could save you money in the long run when
it comes to getting larger discounts for bulk buying, recurring orders, and
maximizing the credit period.

3. Improve the receivables process

In order to shorten the receivables period, organizations need to have a good

collections system in place. One important aspect of working capital is to send out
invoices as soon as possible. Companies should reassess invoicing processes in
order to eliminate inefficiencies that may be causing delays in sending invoices to
your debtors. Such inefficiencies may include manual processing, lost invoices, and
a high volume of invoices to manage.

Deloitte recommends using accounts receivable technology to deliver invoices

electronically in order to speed up billing and collection and ultimately shorten the
cash conversion cycle. It is also vital to ensure that invoices are accurate before
they are sent to your debtors to avoid delays in payments. Maintaining an accurate
debtor’s ledger ensures that you are on top of debtor collection dates and can send
timely reminders to your customers regarding payment.
4. Manage debtors effectively

The best way to ensure you have enough working capital available is to make sure
money is coming in on time. Reassessing your contracts and credit terms with
debtors may be necessary to make sure you are not giving debtors too big a
window to pay for goods and services, as this may be impacting negatively on your
own company’s cash flow.

CFOs should review credit terms with company management to ensure that the
level of credit offered to debtors is appropriate for your company’s cash flow
needs. To reduce bad debts, implement more rigorous credit checks and ensure
that effective credit control procedures are in place for chasing late-paying
customers.

Conclusion
The Covid-19 pandemic has presented a number of working capital challenges for
businesses across a range of industry sectors.

Going into 2022, the economic impact of the pandemic is fading but as seen in
2021, the strong and uneven rebound creates the main macro risk of high inflation.
With prices rising quickly everywhere, businesses must look at new ways to finance
working capital in order to maintain operations.

By focusing on inventory, payables, and receivables, organizations will be best

placed to maintain adequate cash flow and maintain short-term commitments in
the months ahead.

Working capital management is an accurate barometer for assessing the long-term

financial health of a business and ensures that adequate cash flow is always
maintained to meet its short-term commitments. On the road through economic
recovery, managing working capital effectively remains a top priority for CFOs, now,
more so than ever.

If you would like to learn more about how to manage your working capital, you
can download our whitepaper here.

Public Expenditure Planning and Budgeting

Two main problems weakened the process and functioning of expenditure planning and
budgeting. First, there has often been a lack of systemic planning within a macroeconomic
framework, which has tended to reduce the ability of the fiscal authorities to adapt to changes
in economic conditions, leading to piecemeal and ad hoc responses that contribute to
additional distortions and hinder the optimal use of scarce resources. Across-the-board cuts
were often made to the detriment of priority activities. Second, institutional weaknesses have
led to poor coordination between planning and finance agencies. This resulted in rigidity with
respect to monitoring and adopting program changes that might be needed to meet the long-
term targets of public expenditure.

To remedy these problems, three fourths of the SAF adjustment programs incorporated
expenditure planning reforms, particularly the introduction of program and performance
budgeting to promote cost measurement and containment and to improve productivity of
expenditures. Most programs provided for a review of expenditure priorities to restructure
expenditure patterns for more efficient use of resources such as on operations and
maintenance. About half of the programs plan to strengthen multiyear expenditure planning to
allow for analysis of resource implications over the medium term. Improvements in budget
structure allow rolling expenditure plans and budgets to be adaptable to resource realities and
unanticipated changes. Several countries plan to unify their budgets to include both current
and capital items. Many reform programs aim to strengthen the process of public investment
selection, emphasizing the financial links with the balance of payments profile, the foreign
exchange utilization budgets, the debt profile, and the recurrent cost implications. Several
countries also have initiated the preparation of a list of priority projects to submit for donor
support. Efforts have been made to improve the capacity for public investment reviews and
monitoring mechanisms.

To improve institutional coordination at the technical level of budgets and plans, some
countries established working groups or committees of staff from finance, planning, and other
agencies to undertake projections of key economic trends underlying the macroeconomic
framework of the program.

Implementation, Monitoring, and Control

The budget implementation phase is crucial to ensure timely and effective delivery of services,
consistent with approved policy goals. Expenditure management needs to ensure economy in
using resources relative to planned levels, efficiency in achieving the desired output,
and effectiveness in fulfilling program objectives. These aims can be achieved only if budget
managers are able to take account of new developments that may require a reallocation of
resources. In several countries, common problems in budget implementation (which were
usually manifestations of poor budget structure and process) were related to rigidity in
procedures for the release of funds, delays in releasing funds for capital budgets, absence of
systematic commitment controls in finance ministries and spending agencies, and lack of
congruence between physical and financial results, or between inputs and outputs (which often
contributed to an implementation illusion); excessively centralized payments systems gave the
illusion of cash management—often compromised by incurrence of arrears through failure of
proper commitment controls for contracts and procurements and the rush of expenditure
before year-end; and poor information on inter- and intra-government arrears with
autonomous agencies and special funds were sources of extrabudgetary expenditures that
often resulted in a failure to achieve targets.

Most countries with SAF-supported programs have had to reassess the effectiveness of their
implementation, reporting, and control systems and have identified specific areas for quick
reforms. In 17 countries, procedures for the release of funds were revised to control
unauthorized expenditures, fund allocation, and to monitor more closely the release of
investment funds through a better reporting and monitoring arrangement that involves closer
coordination with donors, planning agencies, and line ministries. In 21 countries, procedures to
strengthen commitment control were put in place, including assignment of ministry of finance
accountants to spending agencies, and a requirement for authorization of expenditure
vouchers by the accountant general’s office. In over half of the SAF-supported programs,
measures were taken to strengthen the government accounting and financial reporting
systems. They aim at improving monitoring of treasury operations by modernizing the
reporting and accounting systems through computerization and training of accountants, and
expanding coverage of the information system by improvements that include reconciliation
with central bank accounts, coordination of foreign aid disbursements, and consolidation of
special accounts, revolving funds, extrabudgetary operations, and transfers and arrears with
public enterprises. A few reform programs established formal quarterly reviews of fiscal
developments to ensure coordination among key economic management agencies on a regular
basis to respond to adverse developments as soon as they arise. Improvements in accounting
and audit were started in a few programs to ensure accountability in government and in due
course to encourage the accounting corps to play a more active role as financial advisers to
budget resource managers, particularly with respect to assessment of costs and future
contractual arrangements.

Most SAF-supported programs attempted to tackle the problem of controlling personnel

expenditures. To varying degrees, over half of those also examined ways to introduce civil
service reforms and administrative reorganization of ministries and agencies. Improvements in
staffing of government—particularly to stop the erosion of skilled personnel to the private
sector (the revolving door in the public service)—are difficult to resolve quickly, as they involve
complicated reorganization exercises in civil service incomes and incentive systems.

Almost all SAF-supported programs have included structural measures to rationalize public
enterprise finances and to control and monitor flows between government and public
enterprise budgets. Improvements in the information system with respect to the performance
of enterprises are critical for fiscal and macroeconomic management. Gathering accurate
financial information on their performance is a prerequisite for initiating financial and
economic restructuring strategies for the public enterprise sector. The strain of managing the
reforms in this area on the limited institutional structures in the government should not be
underestimated.