Working capital has generally improved over the past two years for Canadian oil and gas companies, but up to CAD $30 billion of cash is still trapped on their balance sheets, according to the recent "Cash in the barrel" report from American Express^® and EY. The paper's findings further reveal that there are strategies such companies can implement to optimize working capital. The key: properly managing the three pillars of working capital: accounts receivable, accounts payable and inventories. Indeed, an improved cash culture can enhance cash flow and ensure required changes are sustainable.

Adopting a cash culture

In an industry not traditionally focused on cash, many oil and gas companies struggle to optimize working capital. According to the report, a good starting point would be to implement a strong governance model and meet frequently with functional leaders to discuss working capital. The main driver: That managing working capital should not be an afterthought but a primary goal for all oil and gas company stakeholders. Leaders should at least evaluate the capital that is consumed to measure its effect on cash flow in any significant decision. To manage the trade-offs between cost and cash, the report also highlights how the finance team can—and should—be a business partner by giving a hand to the different functions. Process improvements should be tracked after a formal structure is established.

Increasing visibility of how cash flow performs

Unpredictable cash flow in any business, specifically within Canada's oil and gas industry, makes it hard to manage liquidity efficiently. Not having an adequate system to track the impact of working capital is another major problem. To help boost cash flow performance visibility, analytics, along with the appropriate metrics based on key drivers, can greatly help. For this to be fully effective, a company should establish a cycle time performance baseline for main processes, analyze and challenge these findings and continuously measure any gaps to be closed. The report reveals that measuring such financial impact of processes will raise awareness in your company to respond to the need for action. The goal is that the change in management mindset will quickly spread throughout the organization.

Implementing improvements that generate cash flow

Best practices find that successful oil and gas companies should also review what is driving their cash flow, such as their planning of operations and sales, payment terms and timing and their collections and billing process. Digital technologies can also be useful in helping sustain and generate cash flow. Automation solutions and advanced software capabilities can greatly facilitate the optimization of cash flow and improvement of internal efficiencies. American Express works with business clients to enable those type of improvements. By using American Express' unsecured credit, they benefit from paying suppliers on time and may even obtain early pay discounts, while having up to 55 interest-free days* to pay their card bill back. This allows business to keep their cash on hand for longer, giving them more liquidity. The cash flow released from working capital can also serve as a source of funding for investing in growth projects and make improvements.

Preparing the future of oil and gas cash management

Overall, improving cash flow remains a top priority among financial leaders. However, significant challenges must be addressed to support progress in its availability, ongoing management and forecasting. The coming months and years will be a critical period for the oil and gas industry. There is no one-size-fits-all solution to improve the working capital in the oil and gas industry. Although each sector has priority areas for intervention, companies will need to continue to innovate to optimize cash flow while adopting a cash culture. Make sure you have set cash flow management objectives for the next 12 to 18 months and that your organization is ready to implement the required changes.

* As a charge card, the balance must always be paid in full each month in which no interest charges will apply. The interest free grace period is 28, 29, 30 or 31 days from the closing date of the current statement to the closing date of the next statement depending on the number of days in the calendar month in which the closing date occurs. The number of interest-free days varies based on a variety of factors, including when charges are posted to your account, whether your account is in good standing, and the closing date of your statement.

This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.