Spend Matters welcomes this guest post from Bill Stotzer, managing director, and Helen Van Ness, of Alvarez & Marsal.
In any size company and in any economic environment, strong management of working capital should take center stage. Why? In our opinion, it is one of the best ways to quickly improve and sustain the financial strength of your company. So if working capital is so powerful, why doesn’t it demand more focus and expertise? Simply stated, managing working capital has become a highly distributed set of competing responsibilities within the typical corporate structure, each driving to their independent objectives. We have several observations after working with our clients to implement solutions for many of these challenges.
Managing working capital spans multiple corporate responsibilities: inventory management, supply chain, operations, procurement and sourcing, finance, treasury and sales. Coordination among all functional areas is necessary to successfully manage and monitor working capital, and therein lies the challenge. Disparate, uncoordinated priorities and motivators for each functional area often cause working capital challenges.
A typical scenario might look like this: Inventory and supply chain management want ample raw materials, onsite spare parts and finished goods (for manufacturing), SKUs (for distribution and retail) in order to maintain high fill rates and services levels for customers; procurement and sourcing strive for best price points, and may shorten payment terms with suppliers; finance often ignores the detail metrics for working capital; sales and account managers want to keep customers happy and may extend customer payment terms; treasury is challenged at the central point to manage the company’s cash flow and financing instruments by coordinating all these moving parts and will often overlay working capital financing programs to improve cash flow. If compounded by slow economic growth and a constrained lending environment, companies can find themselves in short-term and even longer term cash crunch situations, complicated by the competing functional priorities for working capital optimization.
So what’s the best way to improve working capital? We have worked with our clients to create sustainable improvement in working capital for a variety of industries including a large international manufacturing client operating at a time of various global economic challenges. Here are some tactics we’ve employed to improve the client’s working capital problems.
Improving working capital was the goal of our client’s CEO, so he was the direct sponsor of the project and gathered his management team’s support. Working capital improvement became a collective “top of the house” priority and we became their partner. Our leader’s sponsorship activities included providing proactive, consistent attention and holding leaders accountable for delivering agreed upon targets and measurements.
Addressing the leadership team’s responsibilities by using a RACI matrix for ownership and communication created the foundation for achieving targets. By defining and syndicating each leader’s roles as responsible, accountable, consultative or informative, responsibilities were made transparent and set the stage for effective working capital governance.
Next we needed to create achievable working capital targets. What projects would yield effective working capital benefits and could be executed and sustained by the organization? Our in-depth data analysis yielded insights we then reviewed and validated with the owners based on the RACI matrix. The agreed projects included redefining and enforcing timely receivables from customers, eliminating customer early payment discounts taken after the discount period, negotiating shorter payment terms with customers, extending payment terms with certain suppliers in order to match competitors or market drivers, ensuring supplier invoices were not paid early, as well as reducing excess inventory and better utilization of favorable financing terms and vehicles. All of these initiatives required incremental effort, enterprise planning, followed by a robust monitoring and management program.
Once targets were agreed upon and communicated, the next big challenge involved tracking results. As mentioned, classic financials typically neglect robust and effective working capital reporting. Creating a centralized working capital reporting mechanism as the company’s single source of the truth was an imperative, including a central working capital office, which included an independent working capital role empowered by the CEO to own the tracking effort. We created success tracking, forecast scorecards and overall reporting for the Working Capital Officer to effectively manage results.
Here’s the takeaway. To ensure working capital improvement, the leadership team should be focused on continuous monitoring. Periodic reviews should address role clarity, update target status and identification of challenges preventing the realization of targets, followed by action plans to resolve issues and meet the working capital targets. Utilization of regular reviews, both group and individual, will instill a standard of consistent ownership, delivery and reward to ensure success.
Yes, this can be hard work, but the payoff can be a significant increase in liquidity. If you are willing to take on the tough challenges, improved working capital management can become a competitive advantage in your company.