Following the money to identify and release value from the balance sheet

Theories and strategies of cost reduction that have emerged in recent decades are all based on the lessons of past downturns. However, the current crisis is not just characterised by the sheer magnitude of the market declines. Companies are now focussed not only on cost reduction - the norm during any recession - but also on cash release.

Companies are using approaches favoured by private equity investors to come to fresh valuations of their business. In effect, this approach asks whether there is unrealised value in the business and focuses on critical areas where specific costs can be reduced. By following the money in a disciplined and realistic way, companies can reduce the chances that valuable resources are being poorly allocated.

Seventy-three percent of executives surveyed in KPMG's 2008 Asia Pacific Cash Management Survey said that cash management was a matter of "great importance" or "vital importance" to the running of their company. However, many manufacturing companies in China lack sufficient integration of their supply chain and finance to effect change in this area. Many companies still admit to poor visibility of cash flows - often caused by inadequate linkages between operations and the treasury and finance functions.

Downsizing of inventory has been inevitable for many companies over the past 18 months. However, more streamlined working capital brings its own challenges, and requires not only better planning and communication but also the right choice of suppliers and vendors.

The good news is that many companies have responded to these challenges by improving visibility and control over cash flows and developing more robust cash flow forecasts. The use of cash-focused financial indicators, with policies and incentives to improve performance in those areas, has brought cash to the heart of strategic decision making. These forecasts and indicators are key to making changes sustainable, rather than one-off initiatives.

In the current environment it is not just distressed organisations that need to focus on cash for their survival. With financing from external sources in short supply, businesses that can find and release cash from their working capital and other areas will be best positioned to respond to market changes and preserve and create value for their stakeholders. Companies may be able to achieve sustainable cash flow improvements not only from working capital but also from other areas of their business including treasury, tax, property and other assets.

With the increasing demand for financially efficient supply chains, companies along the supply chain are under conflicting pressure to improve payment terms and cash flow efficiency. Inventory finance, receivables financing and supplier financing are approaches that remain in their infancy in China, but all three offer avenues for buyers and suppliers to reduce their working capital.