The Handbook of Global Corporate Treasury

Chapter Eleven

Liquidity and Working Capital

IN THIS CHAPTER, WE LOOK at working capital, one of the key drivers for liquidity needs, and how companies can appreciate, measure, and reduce the need for working capital and hence external dependence on liquidity sources.

Pressure on the Treasurer to find in-house solutions for funding increases as more and more cheaper sources of liquidity dry up. There is an increasing view that many of the reasons for cash flow inefficiencies are internal, but companies sometimes tend to look at outside sources first before looking internally. Many performance measures and metrics of business and procurement units have targets and incentives based on the top or bottom line, while focus on cash flow tends to be the baby of the Treasurer and chief financial officer (CFO).

This chapter focuses on these points, and how the modern company is managing to work on them to address larger issues and find concerted solutions.

WORKING CAPITAL IN THE OPERATING CYCLE

The Treasurer with support from the CFO works on reducing costs through process efficiency (centralisation, dematerialisation, consolidation, and in-house banking) while adding value through balance sheet efforts (supply chain finance and working on ratios) and process automation (straight-through processing to increase control and efficiency and reduce headcount).

The operating cycle (Figure 11.1) is the chain that starts with cash and moves on to procuring raw materials, manufacturing and storing ...