How to Enhance Shareholder Value by Optimizing Working Capital

Companies with strong working capital have a competitive advantage in the marketplace and are poised to take advantage of growth opportunities—whether that means expanding a product line or acquiring a company. In addition, having significant working and strong liquidity gives CEOs and boards of directors a distinct advantage when it comes to weighing financing options. And, as we pointed out in last week’s blog, CFOs have a more strategic role than ever so optimizing working capital is a key priority.

As we continue to explore the Top Middle Market CFO Challenges for 2017, we look at strategies for optimizing working capital. Simple improvements to payables, receivables and inventory management can help you not only lower operating costs but also improve cash flow. These improvements can come through automation but predictive analytics and real time data analysis is increasingly needed to make the best decisions. Our clients that are embracing the technology and analytical tools to drill into their data and produce actionable insights are the ones that are seizing the growth opportunities. Analytics allow them to scrutinize every part of their financial supply chain and identify the best areas for improvement. It could be using the data to identify outliers for renegotiation within your procurement department; or in your receivables area ensuring an efficient invoicing process and putting in place clear collection strategies to identify potential defaulters based on the analytics. And, data can be used within demand forecasting to minimize inventory.

How to address the insurmountable amount of data

But there is so much data out there and CFOs aren’t always sure what is most critical. Or the data needed is siloed in parts of the organization and not easily accessible. HORNE helps CFOs navigate this changing landscape.

Recently, a retail store was trying to boost their sales nationwide. They knew what products were the top sellers in each store but the data wasn’t being viewed against their inventory system. So, the same inventory was sent to every store—not just each store’s best-selling items. Once the analytics were examined, they could gain insights from the current chaos, connect the dots and make the right moves to boost sales and reduce inventory—thus maximizing working capital.

A key working capital research paper studied data from about 4,000 companies over a 16 year period and found that a staggering 27.7% of their assets were locked up in net operating working capital. They also concluded that every $1 locked up in net operating capital is worth 52 cents less for shareholders than $1 held in cash that can be invested in growing a business—a significant discount of almost 50%.

HORNE PMM is focused solely on Middle Market companies to help you enhance shareholder value. After fully understanding the growth goals of the company, we help them decide what data would be most useful, help them see what they already have and decide how to capture what data they need. We then walk through results the analytics uncover and compare that to their goals and strategic plans so they can make changes that will optimize working capital. This entire process improves CFO decision making, creates operational efficiencies, reduces costs and increases cash flow. 

If you would like to learn how we can help you, contact us. 

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