- Head2Head series
- with Bruce Meuli, Global Business Solutions executive, and Jonathon Traer-Clark, Head of Strategy, Global Transaction Services, Bank of America Merrill Lynch
Aspects of Working Capital Management
By Bruce Meuli, Global Transaction Services Advisory Executive, EMEA and Jonathon Traer-Clark, Head of Strategy and Advisory, Global Transaction Services at Bank of America Merrill Lynch
Bruce and Jonathon debate progress toward truly holistic working capital management, and discuss if and how treasury teams should be harnessing today’s most advanced information technologies.
The evolution of working capital management
JTC
Bruce, you talk a lot about advances in holistic working capital. But you and I both know that industry presentations and conferences have been discussing that idea for years—what’s different today? Where’s the step-change?
BM
I agree with you. Working capital optimisation has been around for a very long time. I think what has changed is that more companies are finding success by taking a vertically functional piece of their organisation, working capital management, and tipping it on its side. That is, they’re increasingly able to practise working capital management as an enterprise discipline. That’s new.
JTC
So what you’re saying is, ‘If I tilt my head 90 degrees, I’m going to see things differently.’ Come on, you’ve got to get a bit more real than that.
BM
Think about it. You’ve been a treasurer in days gone by when the function had cash management at its core. But today we’re starting to include supply-chain management at one end and sales at the other. Essentially, you’re starting to see working capital as an enterprise discipline right across the organisation.
JTC
As a treasurer, I spent a lot of time thinking about things holistically, end-to-end. We wanted everyone at the company, not just those in the treasury department or in finance, to be aware of the consequences of their actions. Those people making decisions about the commercial engagements and relationships of the company—be it with a supplier or procurement, with a new customer or client, or maybe with a funding facility—we wanted them to have a working capital mind-set. That’s nothing new.
BM
Well, here’s something new. Today you’re seeing best-in-class corporations creating a new role; for instance, a working capital champion or a head of cash conversion. Their role is to specifically work with all the different functions in the end-to-end working capital cycle. And there are additional enablers: for example, new communication and analysis technologies and the rise of shared service centres that are allowing working capital to be managed and measured across the organisation.
JTC
Yes, it takes more than just developing a common language for understanding the value of cash to the organisation and getting around some of those silos. But at the same time, one irony of shared service centres is that while they may build a huge amount of efficiency in a particular function or discipline, these can lead to a singular focus on only certain metrics—on specific key performance indicators (KPIs)—sometimes to the detriment of larger enterprises’ goals.
BM
You’re right. But we are also seeing best-in-class corporations use enterprise resource planning (ERP) systems to manage and measure working capital across the organisation. You know, the clue is in the name: enterprise.
JTC
Traditionally, this was seen largely as a cost efficiency move.
BM
Right, but I think what’s happening now is that you’re getting these enablers that allow working capital to be managed and measured across the whole organisation. As a result, I definitely see companies becoming both more serious and more capable in terms of generating better returns from the capital deployed. They’re moving away from cost-reduction working capital metrics and towards something more value-focused — from days payable outstanding (DPO) as a metric through to, say, return on capital employed (ROCE) as a metric. That’s the evolution.
TMI Comment
Companies have long been aware of the value of optimising working capital across the enterprise. Any such efforts however, were often impeded by the high degree of difficulty relative to lower hanging fruit.
What’s changed is that organisations are now flattening and today’s digitally-infused business strategies are building closer links between procurement and supply, logistics, sales and service. And adding treasury and working capital optimisation to the workflow becomes a relatively simple matter.
As such, leading companies are appointing executive champions to the cause. Such champions in turn promote awareness as well as introduce new, capital-focused performance metrics to recruit and rally others. Along the way, they take steps to harness today’s big data technologies to inform analysis—this in turn leads to better decision-making, which has a positive knock-on effect to performance.
In short, the degree of difficulty has been greatly reduced, the benefits are amplified, and the vision of substantially improved end-to-end optimisation of working capital is finally within reach.
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Treasury and the big data revolution
JTC
Bruce, you recently wrote about the role of technologies such as artificial intelligence and robotics in treasury management and working capital. I must admit I thought that was a bit far-fetched… Aren’t these just buzzwords or do you really see a role for them in treasury?
BM
Jonathon, you know I don’t use buzzwords. I think the whole digital revolution and the ability to access data—for instance, from your enterprise resource planning (ERP) system—and to bring that data into a central area and then disperse it as information, has improved dramatically.
JTC
I don't disagree with you; these technologies certainly have a role to play. But for me, the issue is that there’s never just one ERP system.
BM
True, but the ability to store data today is very inexpensive compared to what it used to be. And the ability to take that data, turn it into useful information and send that information to people who can use it—that’s revolutionary.
JTC
Sure – we can we can now take data and add context to it, and that helps us to make decisions. But that raises another issue. In my opinion, a core skill that many treasurers have is their ability to evaluate quantitative metrics with qualitative metrics. For example, how aggressive do I want to be with efficiency in terms of my cash collection cycle versus the cost of doing that?
BM
‘Decision support’ is a term that’s been used in previous conversations around data. I think what people are moving towards now are predictive analytics. Put simply, this means the ability to anticipate cause and effect within the organisation.
For working capital that means, if I do something over here, is that going to have an implication elsewhere in the working capital cycle? Or, where is my cash trapped within the operating cycle? Are there delays within production or logistics? Should I hold more stock because I think more revenue will be generated by having proximity to market? By having this data in a form where it can be pushed back out to the business to be used, that’s where we’re getting more into big data and a predictive analytical capability.
JTC
To me, predictive and behavioural analytics can provide a framework for business intelligence too. They can even do modelling or scenario analysis. But you’ve always got to watch out for that black swan event—and that’s where experience comes into play. So I think it’s great that we have this landscape of information and the ability to use tools to evaluate lots of different choices, but there are limitations.
BM
You mention modelling, which is all about optimising the resources that you have to your desired end. This is one key area where we’re seeing information and data being used more actively. But back to my earlier point about robotics and machine learning—there’s a lot of excitement here too. In a working capital environment, it could mean cash application between an accounts receivable ledger versus a banking statement. Today you might have automated business rules that get to a 60% match. But at the next level, algorithms are starting to say, ‘I’m seeing this event occur. It’s occurred three times. I’m going to make that as a rule myself’. So, you get into machine learning, which is basically where software becomes semi-intelligent.
JTC
And when you start thinking about the treasurer with the CFO and the board of directors, there are even bigger decisions where such decision support might play a role. You can think about the company’s overall position—your capital cycles, M&A and your investment cycles. I guess it isn’t so far-fetched after all.
TMI Comment
Treasury departments have always been able to access a lot of data. But until recently most of it was relatively difficult to compile and analyse without extensive manual effort. Today’s next-generation tools deliver the ability to pull information from emails, spreadsheets, PDF files and remote servers into centralised repositories, enabling efficient processing and analysis.
Key roles include decision support as well as greater automation of routine processes. Easy wins are often available from off-the-shelf banking solutions. But even basic programmes, such as automated reconciliation, can be made more effective with the addition of machine learning.
Treasurers should also look for innovations in areas such as virtual bank accounts. Here, companies can reduce the total number of accounts needed to run their businesses while at the same time, access vast pools of cash flow data that can be used to better optimise their working capital.
The era of big data, business intelligence, AI and machine learning is here. It’s time to embrace them in treasury.