When it comes to putting a company in the best possible position for the future, there’s no time like when the market is favourable. In a downturn, many difficulties will present themselves—all important, all urgent. Chief financial officers (CFOs) that instill a cash culture and promote liquidity while their business environment is positive will be better prepared to survive and even thrive in a potential downturn.

Good times rarely last forever

Over the past few years, the economic environment has been undeniably positive for businesses. The public markets in North America have performed admirably, with the NYSE in the midst of the longest-running bull market in its history. Record-low interest rates have also allowed companies to enjoy years of access to relatively cheap capital.

While many business leaders have spent time improving the effectiveness of their operations, few have focused on improving how they manage their working capital. According to our global Working Capital Report 2019/20, working capital balances have increased by €360 billion, up 9.4% year over year. For many companies, there has been minimal opportunity cost associated with having their cash tied up on the balance sheet.

But many believe that the positive economic trajectory won’t continue indefinitely. There are already warning signs that a significant downturn may occur in the near-to-medium term. The Wall Street Journal’s latest Economic Forecasting Survey found the probability for a 2020 recession to be almost 50%. Concerns about global trade disputes and protectionist policies are also driving increased pessimism. In July 2019, the Bank of Canada warned that trade tensions could disrupt recent improvements to the Canadian economy.

The challenge is that, without a proactive cash focus, companies can suddenly face liquidity and operational stability issues when the market begins to falter. Overreliance on lenders, out-of-control financing costs and growing write-offs of obsolete inventory and bad debts can quickly result in a crisis scenario. Cost cutting alone may not give you the financial resilience necessary to withstand significant fluctuations, let alone deliver cash optionality to take advantage of unique commercial and acquisition opportunities that present themselves in a volatile economy.

Positioning for change

Today’s high-tech global financial markets have the ability to change course in an instant. Yet the fundamental components of working capital often take time to adjust, especially to deliver lasting sustainable improvements. A highly effective working capital optimization program is one that’s embedded at every level of the organization—from C-suite corporate policies to frontline behaviours—and earns buy-in from customers and suppliers. 

This approach requires resources and focus, both of which are scarce in a crisis. What’s more, value chain counterparties are likely to look to optimize their balance sheets and be unwilling to negotiate payment terms, inventory consignment and other levers that might be more accessible in a favourable economy.

While the market is still buoyant, CFOs should take the time to focus on their working capital so they can drive maximum cash efficiency as resources and options are readily available. By acting now, CFOs can gain more control over their cash management, reduce their long-term risks and be well positioned in the event of a downturn.

Optimizing working capital: Where to start?

Top business leaders know how valuable optimizing working capital can be to a business—and yet most also understand they still have a long way to go to truly get it right. In our recent global Creating value beyond the deal report (Canadian insights), 83% of sellers agreed there’s room for improvement when it comes to extracting working capital.

By taking a programmatic approach to optimizing working capital, companies can make changes that will deliver sustainable, end-to-end improvements to their financial position. To begin, management should consider the following activities:

Put working capital on the leadership’s agenda

Working capital should always be a priority agenda item for CFOs and other business leaders, not just in a crisis situation. A healthy working capital position will help make an organization more resilient in the long term. By focusing on working capital management as a matter of course, management can improve their organization’s cash position over time without having to make more drastic changes.

Assess potential opportunities across the organization

Management should examine all functional areas that affect working capital—from supply chain and inventory management to contract management and accounts payable and receivable. By assessing key areas of influence, management can identify best practices, gaps and priority areas for improvement.

Identify and foster culture changes

Creating a cash focus takes more than rolling out new policies or forging new contracts; it requires changes to the culture of the organization. CFOs should work with their broader leadership team to identify how to adjust their organization’s culture and behaviours to make sure all employees understand how their day-to-day activities contribute to the working capital position. They should also develop the appropriate training, incentives and communications to support the transformation.

Don’t wait for a crisis

Working capital is the most inexpensive source of cash available to an organization, so leaders must always make sure they’re using it effectively. Yet optimizing cash management can take focus and time, which companies rarely have when a crisis hits. This is why CFOs shouldn’t wait to put working capital on their agenda. They should work to optimize their working capital now, broadly and programmatically throughout all levels of the organization, so they have greater stability if downturn occurs and are in a position to emerge stronger.