There are several major pitfalls that we should avoid when managing the company’s working capital:

1.Mindset/Belief Change:-

• do not believe that only financial distressed companies should focus on improving the working capital. While it is true that distressed companies do have a particular motivation to improve liquidity, it is a grave mistake to believe that only distressed companies have an interest in improving working capital. Financially stable companies like the present one you are working in can use working capital improvement to decrease borrowings, fund capital investments and improve returns on capital.  Better working capital performance is particularly relevant for companies that track overall financial performance with measures such as EVA or economic profit.  Lowering working capital reduces a company’s capital charge and increases overall returns on invested capital.  Working capital improvement can also lead to better operational cost performance.
   

• Do not believe that only the Finance Function should Drive Working Capital Improvement Initiatives. We need to understand that the normal working capital cycle/cash operating cycle involves all parties whether operational, purchasing, marketing, accounting and management team!

• Do not believe that working Capital Improvement is a short term strategy used to generating short-term results. A short-term focus may be useful for increasing liquidity, but without a long-term commitment to better working capital management, companies will often see these gains erode over time. We must persevere and alert to sustain working capital improvement. We need to do substantive changes to our underlying business processes, performance measurement programs, and incentive schemes. Besides key performance indicator like revenue growth and margin, working capital is an equally critical measurement of business performance. There is a need to inculcate the “cash culture” that many companies aspire to but few achieve.

2. Understand that :

• To Improve Working Capital its not necessary true to invest in large investments in systems and IT. Though it’s true that by putting the right information in the right hands at the right time is an essential component of working capital improvement. However do understand that large investments in ERP systems and costly IT overhauls are not necessary in order to generate results. By relying strictly on IT transformations will only delay the opportunity to improve working capital performance until the right systems are in place. Don’t forget that some ERP systems can take several years to implement and the implementation process can cause significant disruption to the business. Achieving meaningful working capital improvements without relying extensively on IT systems requires probing interviews, simple debtor listings, contract reviews, and basic process mapping to diagnose improvement opportunities.  Less complex systems improvements such as the installation of a data warehouse and a business intelligence system can substantially improve access to working capital information, but do not involve the cost or the implementation burden of many ERP systems.

• Working Capital Improvement needs not be a large corporate initiative re: don’t wait for your top management to say so and don’t think that it should be a complex corporate program. Instead
  meaningful results can be obtained with a focused effort on a few key areas of the business. Use the 80/20 rule to identify business units or product lines that represent the lion’s share of the working capital.

The above steps need to be understood before proper long term working capital management can be sustained.

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