Changing ways to oversee your working capital

 |  Jun 30, 2018

A thousand everyday decisions are helping large businesses make better decisions to free up cash. All of this, because of one reason  – they took advantage of the cultural shift. 
There are  hundreds of day-to-day business occurrences that are so routine as to seem inconsequential. Perhaps it is the hotel manager who decided to order several months’ more worth of spare gift boxes than usual – in this process he tied up more cash to avoid his worries of running out of these gift boxes real soon. Or the employees of a company who were three days late issuing an invoice for a shipment missed their deadline – delaying payment for complete 30 days. Or a procurement manager at a company offering financial services overlooked at the payment terms and conditions deep in the new supplier contract. They inadvertently agreed to pay within ten days instead of making use of an open window of 45 to 60 days. 

Stories like these happen around the globe in all large companies, at all levels and all business units. If we take a closer look, they can largely undermine the performance. Senior and mid-level manager are so often focused on profitability, they give scant attention cash conversion cycle. 

Why is that?
 
Managing inventory, payables & receivables is painstakingly difficult. A number of variables are playing their role and responsibilities are spread across different functions finance, supply chain, marketing & sales, procurement and others. 

Given these entanglements, sustainably running the business with a limited amount of working capital requires new ways of getting work done. 

 
The analytical toolkit used by finance function (made with years of experience and hardship) is the only answer to organizational transformation. As far as we can tell, this incorporates supporting awareness and conviction, fortifying behaviours and practices with formal instruments, and deploying the right talent with skills to pull-off a task. The return on these efforts can turn out to be a surprise. It’ll reduce the amount of cash needed to run a business by 20 to 30 per cent – often considerably more.* Recently, a natural resources company reduced its working capital by three times its initial target. 

Obviously, the push to enhance working capital ought to be aware of not tipping over into increasing risks to quality, fulfillment or taking any other risk that impinges on operations. Also, not setting an ironclad terms & conditions document that all your loyal customers flee to your competitors. Yet, the reality is such  – there are buffers at every level of the business & hyperconservatism often leads to retardation. Many organizations have demonstrated drastic improvements with right balance of attention to detail & operating discipline to show stronger stewardship over their business. We found a handful of approaches particularly worth a shot to improve working capital.

 

Fire motivation with conviction
 
Day-to day routine of any employee is hard to change. When mindsets of the employer and the employee to do not function at the same frequency to execute a task, some of the bad habits that a program seeks to expunge, could quickly return. Given a large number of people are required to participate in the program, we’ve found that explicating improvements in working-capital w.r.t. being great at one’s KPIs can make big difference to persuade them. 

As we know, only a CEO has the clout to set the vision. Hence, his explicit involvement is required to make changes in the culture around working capital. In one recent working capital transformation, a CEO personally announced performance targets, made it crystal clear to his executive team that their careers depended on delivery, and talked about significance of working capital with his workforce. But this doesn’t mean that a CEO needs to run the entire program. At the end of the day, many will delegate everyday insights to other executives. For example, the CEO appointed a CFO of a particular subsidiary to oversee the program as the group-wide “cash leader”.  

 
Promoting a steady drumbeat of success is a must
 
With right targets at right place, front-line workforce, middle managers and those with intimate knowledge of practices in, say, collections – will be best employee to allude to. In this way you can brainstorm for ideas that build momentum with a steady drumbeat of success stories. In one recent transformation, supervisors traced initiatives taken by their employees when guided by their managers. Each week, they sent an email to the entire business unit, celebrating the most successful stories and revealing the people behind them. This inspired others to tackle similar challenges. 
Being realistic, working capital performance rarely improves uniformly across every function & region of the organization. Dashboards that reflect the performance of the employees can allow management to assess noteworthy milestones of success, and quickly address the areas of concern. For example, mid-level management of an IT company started measuring the frequency of invoicing in region. As invoices are primary indicators of accounts receivable, that enabled them to rectify problems present in certain areas before they hit their balance sheet. Most of their clients were willing to accept the new terms than initially expected, shifting the internal debate from  – why some of them must be exempted to why they shouldn’t be.
Keeping the center lean
 
Even though all the employees are responsible to bring change (which is never easy), they need help to accelerate their work from a central team. A team that can manage the program and provide specialized expertise. Yet in our experience, a team that is so large that it becomes noticeable can make rest of the organization feel like the on-going culture is being deviated forcefully and not something they should own or deliver themselves. Alternatively, a lean central team that reports overall progress to the management and places all the enablers such as training and polices, can catalyze in a constructive way.  
Such specialized skill sets are not common in most companies. For example, when an Information Technology equipment manufacturer deployed a team of data scientists to the other departments of its organization to help uncover patterns in customers’ payment behaviors. The analytics-driven recommendation engine reflected accounts that are likely to require escalations, such as collection calls & sales stops – resulting in a 20 per cent reduction in the DSO by increasing the speed and targeting of collections. 
***
Better working-capital management can deliver surprisingly strong returns. Nurturing awareness with strong conviction, establishing mechanisms that you can embed in the system formally, and deploying the right talent and skills, can help. 

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