Now that we’re in a credit crunch, articles are cropping up everywhere with “ideas” on how to win more working capital. Some are good, some are not-so-good, and some are downright dangerous. To make sure you know which method falls into which category, I’ve decided to collect the most common “ideas” into one place and categorize them for you, so you don’t have to worry about selecting the wrong method and jeopardizing what might be an already hazardous cash-flow situation.

The Good

• Cash-Flow Forecasting
  Identify the periods where you will need cash well before they happen so that you can dialogue with your customers, suppliers, and bankers to get you through those periods of cash-negativity.
• Move to More Sustainable Product Lines
  Make sure that even if you’re in trouble now and have to “weather the storm” for the next few months, you’ll be in a state of financial health to take advantage of the opportunity when the market comes back — because history will compete and it will come back strong when it does.
• Customer Relationship Management
  Understand your customers’ cash-flow situations, when they can pay, and how this will affect you. If they can’t pay on time, and you need cash, you need to know in advance so that you can arrange to borrow against, or sell, the payable. If they can’t pay on time, and you can wait an extra 30 days, agree to treat it as a “cash loan” and charge a fair interest premium. It will save your customer money while improving your future cash situation.
• Inventory Optimization
  Inventory costs you overhead. Up to 30% or 35% of the product value. Streamline your supply chain and take out as much inventory as you can. It will improve your cash flow by reducing cost and improve your cash flow by reducing the amount of working capital tied up in inventory.

The Bad

• Identify Cash-Thirsty Areas
  Knowing where you need cash isn’t good enough. You need to know why. If it’s a failing operation or product lines, you need to axe it and refocus on more profitable operations or product lines.
• Focus on the Biggest Projects First
  This might sound good in theory, but the biggest projects might not yield the largest cash savings opportunities. If it’s a people intensive project, you can’t just cut people and expect to reduce cash-flow. In the short term, with legal costs and severance pay, you’ll increase cash-flow. Then, when you need to hire them back, you’ll have recruiting costs, HR costs, and ramp-up costs. Sometimes the smaller projects, such as replacing a telecommunications infrastructure when you might be able to save money just be renegotiating a new support agreement with a lower-cost service provider, might have larger savings opportunities.
• Shift Inventory to Suppliers
  While VMI is good if done right and implemented up-front (so that products are not produced until needed), forcing your suppliers to hold your excess inventory (without warning) is bad as your suppliers will be counting on your payment to pay their raw material suppliers and payroll, which could worsen their financial situation to the point of bankruptcy.
• Factoring as your Main Financing Strategy
  
  Although factoring sometimes makes sense if you can get a good deal and it will cost you significantly less than a loan, relying on it as your primary fall-back strategy is problematic, especially if a number of your suppliers all of a sudden get their credit worthiness downgraded.

The Ugly

• Extending Days Payable Outstanding Across the Board
  If a strategic supplier is hurting, and you’re its largest customer, this might force it into bankruptcy. What’s that going to do to your already ailing cash flow when you have to rapidly switch to a higher cost supplier and expedite shipments?
• Use a Debt Collection Agency
  Nothing improves supplier relations like a third party collection agency that will call your supplier everyday and threaten to sue its deadbeat ass off. Just don’t do it.