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In this guest post, Procurement Leaders invites Deutsche Bank’s Alexander Mutter to look at some of the potential traps connected with managing liquidity and where procurement chiefs should focus their efforts.
Optimal working capital management practices allow organisations to take control of cash flow. Yet this can be a somewhat fluid process that peaks and troughs in line with supply and demand. As a result, companies can leverage available liquidity reserves, benefiting from a degree of certainty and consistency with respect to funding.
And this is exactly what companies need if they are to ensure business continuity and encourage future growth. Most companies know that minimising risk and unlocking trapped liquidity to maximise returns are key to successful working capital management.
Yet are they aware of the full spectrum of issues that can hinder working capital management? Do they know that, in doing what they perceive to be the ‘right thing’ they may be inadvertently creating working capital inefficiencies that will undermine their efforts?
Indeed, many companies have demonstrated their credit worthiness by paying invoices as quickly as possible. However, there are inherent problems to this approach, as it leaves companies with no real buffer in the event of a payment default or business interruption. It can also lead to unnecessarily high inventory levels and storage costs – both of which can lead to gaps and shortages in liquidity. But with the right guidance and support, this problem can be avoided.
One of the chief ways to spot – and close – potential liquidity gaps is to increase the transparency of the working capital process – and not just within individual organisations but across end-to-end supply chains. And this, in turn, can be achieved through greater co-operation between buyers and suppliers under the guidance of an expert partner bank.
Making working capital work requires a range of solutions. At Deutsche Bank we combine international trade risk mitigation with tailored and flexible solutions for structured trade and export finance, as well as financial supply chain solutions. The aim is to improve access to liquidity, optimise risk management and dedicate resources to future growth.
Alexander Mutter is head of trade and cash solutions advisory, EMEA global transaction banking, Deutsche Bank AG. He has a regular column in Procurement Leaders Magazine.