Four Ways to Make Working Capital Work
by Robin Bergholm, Head of Working Capital Management, Wholesale Banking, and Joonas Junttila, Global Business Developer, Trade Finance Sales Development, Nordea
Organisations can improve their working capital by focusing on four key areas, according to new research by Nordea. We studied working capital management (WCM) across 403 Nordic companies to find out how they are performing and how they are making working capital work for them.
WCM is important to every business — it can help you improve cash flow, enjoy a better re-turn on invested capital and reduce funding costs. But achieving effective WCM can be challenging.
To find out how the Nordics are faring, we analysed the key financial metrics of 403 companies over the period 2008–2013. Using publicly available sources, we then took a deeper dive into the measures implemented by 15 corporates that significantly improved their days working capital (DWC) to understand how they got it right.
Working capital performance in the Nordics is improving. We found there was a relative improvement of 6.8% or five days in DWC between 2008 and 2013.
Our research shows that regardless of your industry or initial DWC figures, there are measures you can put in place to improve WCM. And we were able to identify four key areas that you should focus on within your WCM programme.
1. Make working capital management a priority
The key to improving DWC is making WCM a business priority. All 15 companies we studied in depth had done so. WCM should be supported at all levels, but especially by your management and C-level executives who need to drive it forward. A WCM programme can be a huge undertaking and can only succeed if it is led from the top.
To help ensure WCM is recognised and treated as a priority, some organisations are tying remuneration for senior staff to working capital targets. For example, Electrolux’s remuneration model for its managers is related to the efficiency of its working capital.
Case study: When we looked at Amer Sports’ annual filings, we discovered the company rewards its business area presidents based on working capital, as well as EBIT net sales and group targets. The company showed an improvement of 39 days or a relative change of 26% in DWC from 2008–2013.
2. Optimise inventory management
Minimising the amount of cash that is tied up in inventory is a crucial part of any WCM programme. To achieve this, the organisations we studied were looking at measures such as balancing customer demand with supply, and changing the way inventories are managed. And some had centralised their warehouses and sought to reduce the complexity of stock keeping.
We also found examples of organisations using different production models to reduce DWC— for example, by manufacturing customised, low-volume goods to order, but using customer forecasts to plan production of standard, higher-volume goods.
Case study: Clas Ohlson improved its inventory turnover by seven days, according to its annual reports. With inventories and non-current assets making up 90% of its assets, the company designed internal controls focusing on identifying and preventing deficiencies. The company boosted its DWC figure by 14 days or 24% during 2008–2013.
3. Streamline supply chain management
Streamlining the supply chain is vital to WCM. Your supply chain must be lean and efficient as it touches all aspects of your business, from raw materials through to delivery of the final product.
Organisations that improved their DWC streamlined their supply chain by focusing on their relationships with suppliers — this included harmonising and extending payment terms, rationalising the range of suppliers, and moving more towards in-house manufacturing.