7 steps to elevating working capital performance: the CEO of a software firm offers advice that companies should consider to free up cash locked in credit, receivables and payables by using business process improvements, technology and change management.

• Author: Gundavelli, Veena
• Position: Treasury: working capital

In this challenging economic climate, Global 2000 corporations are looking for new ways to stimulate growth, improve financial performance and reduce risk. Working capital tied up in cash flow is quickly being seen as a "hidden reservoir" of efficiencies that can be tapped to fund growth strategies, such as capital expansion. Cash flow locked in credit, receivables and payables can be freed up by using a recipe of business process improvements, specialized technology and effective change management.

According to a McKinsey & Co. study of the top 24 U.S. corporations, a total of $162 billion in cash flow can be freed by streamlining receivables and payables processes. This is equivalent to an additional 5 to 9 percent in net profits. Companies today face many barriers with achieving excellence in these finance processes. Key issues around this are disconnected global systems and processes, lack of best practices for finance functions, managing emerging markets, dealing with mergers and acquisitions, and complying with mandates like the Sarbanes-Oxley Act.

The following seven steps serve as an effective roadmap for corporations looking to squeeze the highest returns from global working capital management.

1 Concentrate on free cash flow as a performance metric to drive the organization forward.

In recent years, external investors and analysts have started to valuate corporations based on more than just revenues or earnings. Specifically, after debacles such as with Worldcom Inc. and Enron Corp., investors have realized that earnings statements can be misleading. Now, a tighter focus is being placed on cash flow from operations, along with other balance sheet metrics.

Free cash flow, a measure of how well corporations are generating cash after capital expenditures, is increasingly being seen as a signpost of corporate efficiency. As corporations improve their working capital management, their free cash flow also increases, potentially leading to higher valuations by investors and subsequent increases in shareholder value.

2 Integrate credit risk, receivables and payables management from a performance management, process automation and cross-enterprise collaboration standpoint.

These finance processes comprise the cash inflow and cash outflow portions of the working capital cycle. In order to effectively manage global working capital, the customer-to-cash (composed of credit risk and receivables management) and the procure-to-pay (composed of...