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Inflation has made agile working capital management business critical. Are you ready?

As central banks are fighting against the highest inflation rates in 40 years, interest rates are rising quickly – and inadvertently shining a bright light on an area of finance that hasn’t been a key area of focus: liquidity forecasting and working capital management. For decades now, financing costs for businesses have reliably been incredibly low, so liquidity hasn’t been top of mind. But as the world turns, so do economies and interest rates.

The importance of working capital management

Rising financing costs mean CFOs need to find new ways to understand and micromanage their cash and liquidity, and change is needed. In his many conversations with finance executives, Thomas Mehlkopf, SAP GM, Head of Working Capital Management Center of Excellence, states, “Many execs say they don’t have access to the up-to-date data they need to do accurate liquidity forecasts or working capital planning. It’s not uncommon for available data to be weeks old. You can’t do much good with old data – especially in today’s fast-changing environments.”

 

For the foreseeable future, you must be prepared to manage liquidity and cash flows with high levels of accuracy so your business can understand the impact of inflation, act quickly, and be prepared for what’s next. 

How prepared are you today to cope with macroeconomic changes?

Take a self-assessment to determine if you are ready for inflation, or any macroeconomic shifts, by answering the following four questions:

 

1. How confident are you in your cashflow and liquidity forecast? Are you able to easily include real-time data and impacts from sales and commodity price development in your forecasts?

 

According to Mehlkopf, few CFOs and treasurers will say yes. The reality is that most liquidity forecasts are done in spreadsheets, and it takes them days, if not weeks, to pull together the necessary data from across their enterprise. So, by the time they do reporting and forecasting, the data is out of date and analyses are no longer accurate. 

 

To understand the impact, businesses need is a way to get insights into different risks, exposures, and actuals in one financial system so you can manage working capital optimally – for example, by:

 

  • Preparing for rising commodity prices by predicting future cash flows
  • Knowing your FX and interest rate exposures so you can effectively execute hedging strategies
  • Balancing risk, inventory management, and customer service to manage inventory targets
  • Uncovering savings opportunities with real-time intelligence into enterprise-wide procurement

 

2. How easily can you find and release cash tied-up in your business and supply chain?

 

Without effective working capital management tools and processes in place, finding and releasing cash tied up in business and supply chain isn’t easy. The ability to act quickly on urgent business events or opportunities as CEO and CFO is more important than ever, and yet most companies are not prepared to do so. Having visibility into your entire cash conversion cycle is a good starting point. 

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3. How prepared are you to handle what’s next in our unpredictable, ever-changing world?

 

To be prepared, you need the agility to respond swiftly and effectively to forward-looking insights and forecasts. This requires having the right strategy, the right tools (such as a flexible working capital management platform that provides a centralized view of liquidity and scenario planning functionality), and the right processes for proactively managing impacts. 

 

4: Is there CFO leadership to establish cross-company working capital management targets and an aligned strategy?

 

Managing liquidity and working capital is a cross-company effort. Think of it as a team sport that requires strong CFO sponsorship. Only the CFO can break through layers of departmental pushback on sharing data and work with stakeholders to determine what to prioritize and what strategy and goals to set. 

 

If you leave all this for different departments to figure out, you’ll end up with conflicting goals and a misaligned strategy – something no company can afford any longer in times of high liquidity cost and uncertainty. 

So, how did you do?

Were you able to answer all four questions? If you could, great – you’re in the minority today, and that’s a good place to be. If not, know you are not alone. The good news is that inflation management solutions are available to help you take charge of your liquidity and working capital. One thing is for sure – liquidity will remain top of mind, especially in the context of an upcoming recession. So, there’s never been a better time to focus on this area. 

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