Firstly, the way you measure your working capital is probably not sufficiently data-driven and not sufficiently transparent to your operational management team. Secondly, there is likely no overview of the many options and levers available to improve liquidity, including understanding the difference between bad and good cash, i.e. your key strategic capabilities.
Finally, many organisations have adopted new ways of working during COVID-19 in connection with the implementation of new operating models, such as an increased focus on new sales channels. But all of these new ways of working can lead to inefficiency in processes, which consequently lead to an increase in cash tied up in working capital.
This is why now is the perfect time to implement an operationally founded, continuous improvement approach to working capital management. Working capital management needs to again become embedded in our daily work and to be continuously measured with a data-driven and fact-based approach.
WHERE TO BEGIN?
As CFO, the task of monitoring working capital lies with you. But where to begin?
The quick answer is to first understand how your score compared to your peers. This can offer inspiration for improvements areas. But the real value lies in the next step, which should be to define your improvement catalogue.
Last but not least, you need to monitor performance. And monitoring should be based on real-time data to enable quick and informed decision-making and actions. It is not enough to monitor days of sales outstanding – we need to understand trends and root causes on the customer level.
So the actions which are needed now to secure efficiency in the processes are:
- Find out how your NWC performance compares to your peers. This can be done relatively easily with a benchmark based on annual reports. It will indicate if there is potential or not. If you have the possibility to do an internal benchmark on the business unit level or company level, your business case will be much stronger
- If your benchmark indicates a potential for improvement, your next step should be a transactional analysis to identify where you can identify the highest potential in your sub-processes. The result of this work should be a prioritised improvement list with prioritisation based on the parameters potential, effort and time
- When it becomes time to implement the improvements from your prioritised list, it is important to set targets and measure progress. A key to success can therefore be to establish governance for WCM and a dashboard that measures performance in sub-processes, e.g. your dunning process. Otherwise, how will you know whether or not your improvements bear fruit?
WHAT CAN YOU GAIN?
Typically, you could pick up between 5-10% of your revenue in cash for next-year investments and improve your return on capital employed. All simply by improving your working capital management. But even more importantly, by providing analytical dashboards and continuous focus, you contribute to embedding a cash mindset in your organisation that will keep your processes in competitive shape and safeguard EBIT as well.
BUT WHERE TO BEGIN?
You need to slice up your elephant and prioritise your efforts. Check out the trends in your DSO, DPO and DIO, sit down with your finance team to develop hypotheses on how these overall levels can be improved and then test these hypotheses with your leadership colleagues. And remember to enable transparency in your management team on how much cash can be released. This will promote motivation and give you a good starting point for embarking on your data-driven approach to working capital management.