Working-capital improvement doesn’t need to be a zero-sum game either. 3 Christian Grube, Sun-You Park, and Jakob Rüden, “ Moving from cash preservation to cash excellence for the next normal,” McKinsey, September 29, 2020. Our colleagues have sketched out a wide range of ideas. Companies may also use synthetic methods, such as supply chain financing, to reduce working-capital investments. As companies grow, it’s common for them to ignore the balance sheet and prioritize the P&L, resulting in a greater investment in working capital than necessary.Ĭommon approaches to improve working capital include optimized payment terms (for both customers and suppliers), standardized payment processes (which can also create operating efficiencies), and improved inventory target setting and process adherence. Working-capital management-across accounts receivable, accounts payable, and inventory-is often ripe for cash opportunity. 2 In times of crisis, stronger companies may decide to voluntarily increase their working-capital balance to support smaller, more fragile customers and suppliers (for example, by allowing customers more time to pay invoices and by paying suppliers early). In fact, across many sectors, there are companies that achieve a negative cash conversion cycle (they get paid by customers faster than they pay their suppliers), providing a cost-free-financing option. Rather, efficient working-capital management sets the leaders apart from the laggards within each industry (Exhibit 1). It’s well known that cash practices vary by sector, but our research reveals that industry is not destiny for cash management success. Here, we focus on structural cash management improvements in working capital, capital expenditures, and other balance sheet opportunities. Embarking on such a journey requires an organization-wide effort and strict discipline. Cash management is the result of thousands of decisions a day. In the search for optionality, companies shift mindsets from their traditional P&L focus to a more balanced approach that also scrutinizes the balance sheet. In this article, we share both timely and timeless insights on why balance sheet discipline, particularly cash excellence, matters and how to bring it to your organization. Simultaneously, leaders can strengthen the cash culture across their organizations by changing underlying systems and mindsets and by implementing no-regret moves to embed cash excellence into ongoing operations.Ĭash excellence never goes out of style, but it’s especially valuable when banks and other financers are showing some reluctance. It all starts with a full review of the balance sheet for cash-releasing opportunities. And a renewed focus on cash can last beyond short-term ups and downs to translate to long-term outperformance. Effective cash management directly improves ROIC and return on capital employed-two vital metrics that attract investor confidence. Of course, managing cash isn’t just important for organizations that struggle with financing. Some companies are so cash excellent that they effectively enjoy a cost-free Not only that, some companies are so cash excellent that they effectively enjoy a cost-free source of funds.Ĭash excellence can provide companies the vital optionality to invest while others remain challenged. Cash excellence can provide companies the vital optionality to invest while others remain challenged. Critically, that means what we call “cash excellence” (a set of best practices that stress prudence and liquidity). Maximizing such optionality requires disciplined management of the balance sheet. 1 “ Planning for 2023: How US-based businesses can succeed when capital and talent are constrained,” McKinsey, December 16, 2022. Previous McKinsey research has found that businesses that preserve optionality- the ability to quickly deploy cash to fund investments for long-term value creation-outperform those that don’t. “Where can we get financing?” For many, the answer is to look within. As central banks lift rates, external financing is becoming more difficult for companies across sectors. Geopolitical risks, strong labor markets, persistent inflation, yo-yoing consumer sentiment, and a host of other confused signals have left business leaders with little certainty about the future. The macroeconomic outlook might be even more uncertain now than it was a year ago, which is saying something.
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