What is the biggest challenge in managing working capital? Permjit Singh Treasury Consultant finds out
According to a survey by Treasury Strategies, a division of Novantas, the most common obstacle to optimising working capital for Treasurers is the quality of data used (for forecasting). As the saying goes "garbage in, garbage out". The next biggest challenge for treasurers was forecasting accurately when their customers (debtors) will pay. Part of the problem is knowing who will not pay cash owed on the due date (default) and what percentage will never pay the cash (resulting in a write-off).
For some treasurers, variance analysis was their biggest challenge. This process involves analysing the difference between what working capital balances were forecast and what balances actually occurred, and understanding why the differences arose and trying to reduce them in future.
Some treasurers might be hampered in managing their working capital by relying on indirect working capital forecasting methods prepared by FP&A versus preparing them within Treasury and using the direct and simpler Receipts and Payments method of cash forecasting.
Poor working capital management caused by poor cash forecasting can result in significant amounts of cash unnecessarily tied up in a company's working capital, such as its debtors or over-stocking. That cash could be better deployed in producing positive cashflow or reducing interest unnecessarily being paid on debt outstanding.
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