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4 Steps to Optimizing Your Company's Liquidity Levels for Better Working Capital Management

by Sven Lindemann | SAPinsider, Volume 16, Issue 1

January 1, 2015

Too often working capital management is put on the backburner and organizations miss out on releasing 20% to 30% of fixed capital. This article lists four steps organizations can take to enhance their accounts receivable and accounts payable management to optimally match inventory levels to demand and significantly reduce days sales outstanding and optimize days payable outstanding.

 

Effective working capital management is one of the key parameters with which CFOs can optimize their company’s liquidity levels. In fact, with the right approach, organizations can release 20%-30% of fixed capital. These optimization efforts should therefore be moved to the top of the corporate financial agenda.

Too often, however, working capital management is put on the backburner because external cash is readily and cheaply available in the financial markets. It’s tempting to borrow money at low interest rates, but what happens when financial markets and interest rates pick up again? This cash source could dry up, leaving companies that have become over-reliant on it strapped for cash.

In our experience, companies that have enhanced their accounts receivable and accounts payable management have been able to significantly reduce their days sales outstanding (DSO), optimize their days payable outstanding (DPO), and capture large gains both in terms of cash and better returns from interest or early payment discounts. Consequently, they make the most out of internal resources and are more cash-independent. Let’s look at four steps to take to reach this level of efficiency and cash independence.

Step #1: Look at What You Have

Surprisingly, many companies are not fully aware of the great potential in their existing SAP system for improving working capital levels. Reviewing which features are necessary for effective working capital management and which are already available is paramount for identifying and realizing optimization potential. The Hanse Orga Group offers a tailor-made consulting service to reap maximum benefits from your SAP system.

Step #2: Enable Better Business Processes

While the central SAP ERP system offers a solid foundation, versatile solutions that offer specialized functionalities and SAP integration at the same time are a valuable stepping stone for the further streamlining of processes. Hanse Orga is currently developing a new solution for working capital management that will deliver full transparency over the accounts receivable and payable processes. Analyses and benchmarking of key performance indicators (KPIs) will reveal optimization potential for liquidity management and its effects on profit and loss.

Step #3: Automate the Cash Application Process

In most cases, the biggest and easiest improvements for working capital can be realized on the accounts receivables side. For example, by automating the processing of bank statements, remittance advices, and lockbox data with specialized matching algorithms — such as those Hanse Orga offers within its FinanceSuite software family — companies can reach automatic hit rates of 90% or more and speed up their dunning process.

Step #4: Pay Invoices at Strategic Times to Help Improve DPO

Making payments not before the due date or paying early to benefit from discounts affects working capital. Centralizing control over payment dates and standardizing payment processes help to optimally steer outgoing cash so that a company’s cash position can be adjusted to the ideal level.

With efficient working capital management, CFOs can significantly enhance a company’s cash position.

Learn More

Find out more about the specialized consulting and solutions offered by the Hanse Orga Group and its subsidiary SymQ to optimize your working capital management at www.hanseorga-group.com.

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Sven Lindemann
Sven Lindemann

Chief Executive Officer
Hanse Orga Group



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