Cash is always king: How chemical companies are optimizing their working capital management
Cash is always king
During the global downturn, working capital management was top of mind for the chemical industry. With today’s increased revenues and ready access to cheap debt, companies might feel that they have fewer incentives to change their processes. However, effective cash and working capital management should be a consistent part of business as usual — not an emergency plan reserved only for economic downturns or financial stress within the company.
A plan for all seasons
By its nature, chemical manufacturing is capital-intensive, so companies should always manage this capital as efficiently as possible. Chemical manufacturing is also part of a cyclical and ever-changing industry. Other uncertainties such as oil and gas prices, a change in interest rates or new directions in the global economy can have a ripple effect across countries, regions, supply chains and industrial sectors, impacting chemical companies at multiple levels. The best approach for cash and working capital management is always to “hope for the best but plan for the worst.”
Developing a cash culture
The mark of a well-run business is a cash culture based on effective working capital management. Unlocking cash is always cheaper than borrowing and less disruptive than selling assets. This cash can be used to fund new growth, retire debt, gain price discounts on cash purchases, benefit from a top commercial credit rating, and take advantage of market opportunities.
Greater transparency is another important benefit. A “clean-sheet,” zero-based assessment based on accurate, timely data and rigorous analysis can lead to a better understanding of capital levels that can, in turn, reveal waste and inefficiencies. The assessment can also provide managers with a more informed understanding of supply chain and operational processes.
Optimized, not just minimized
Working capital management is more than just a matter of squeezing out cash. A holistic strategy should be developed by stakeholders across the enterprise. Although finance usually takes the lead, target setting should be a collaborative process that involves procurement (for accounts payable), manufacturing (including inventory) and sales (for accounts receivable). Chemical companies should also explore other areas of cash and working capital management sometimes overlooked, such as indirect tax, pension funding and capex cash controls.
Good working capital management is a matter of getting the basic things right— and then keeping them right. That is why chemical companies need to develop sustainable initiatives for cash and capital management based on a strong framework built on visibility, control, organization and capabilities.
Expect the unexpected
CFOs, finance directors and other company leaders should keep in mind the wisdom of expecting the unexpected. In today’s global economy, black swans are not as rare as they were in the past. The effective management of cash and working capital can improve performance while managing risk. A holistic approach that emphasizes a sustainable cash culture will help chemical companies take better advantage of opportunities during the good times and prepare themselves against market contractions and fiscal downturns.