Published: January 01, 2000
While economic conditions and credit availability are rebounding, companies continue to focus on boosting working capital by measuring performance and switching to more efficient payment tools.
During the depths of the financial crisis, corporate treasuries were tasked with increased strategic responsibilities and providing greater visibility within their organisation. Notably, economic and market uncertainty led corporate treasurers to generate a surplus of working capital by enhancing cash visibility and freeing up trapped cash resulting from inefficient internal processes.
Stronger markets, broader credit availability, record cash balances and the economic improvement in developed countries are giving corporate leaders the confidence to think longer-term.
Today, many companies are shifting into growth mode once again. Stronger markets, broader credit availability, record cash balances and the economic improvement in developed countries are giving corporate leaders the confidence to think longer-term. But despite these macro-level improvements, astute companies continue to employ working capital best practices developed during the credit freeze. Maximising working capital remains essential for enhancing financial flexibility, funding growth projects and adapting to changing regulations.
When seeking working capital opportunities in your organisation, payables is a great place to start since you can exert greater control relative to other areas, such as receivables and inventory. But before you undertake a major project to improve your working capital, it’s important to consider three common challenges.
Although most treasurers are aware of the importance and potential benefits of improving working capital, there can be some barriers to launching a project.
The first—and potentially the biggest —challenge is in measuring your company’s current working capital performance. Despite the unprecedented availability of data, essential payables metrics—which can include the number of payments you are making, how you are making them, whom you are paying and the average cost per payment (cost per cheque, for example)—often remain unclear. Relying on multiple internal systems that aren’t connected can exacerbate the problem, making it impossible to efficiently aggregate information needed to assess current performance and create a baseline for improvements.
The second challenge is that many companies tend to operate within silos, hindering their ability to think holistically and drive working capital improvements at the company level. Efforts to optimise payables are likely to fall short without close co-ordination between corporate treasury, procurement, accounts payable and supply chain, including robust initial dialogue and regular communication about what’s best for the company overall, rather than individual departments.
Finally, many organisations have grown weary of change, given the extraordinary steps required in some cases to persevere through economic uncertainty. It’s essential to take a strategic approach to managing your project team that emphasises communication and collaboration while enabling sceptics to share their views. Taking time in advance to outline the processes and metrics you want to improve can be a powerful way to rally your people around a shared vision of success.
The right planning and knowledge can help you surmount these challenges and reap the financial rewards of improved working capital. There are multiple ways to address the challenges you face and help lead a successful change initiative.
Harnessing the power of your data is easier when you have access to deep payables expertise and consultation. Benchmarking with key performance indicators (KPIs) is crucial to understanding your performance as it relates to industry peers or other companies your size—rather than an isolated point in time—and considering historical trends and what fluctuations (or volatility) in the KPIs mean to your organisation from a cash flow perspective. In addition to KPIs, examining your spend segmentation—including strategic, recurring and non-recurring payments—is equally crucial to setting your strategy and identifying the right goals and solutions. Your bank should be able to provide you with spend analytics and help you measure the most important payables KPIs, which include days payable outstanding (DPO), the portion of your payments that are made by cheque rather than electronic methods, your cost per cheque and more.
Once you have measured your current performance, you may go deeper into your spending habits to uncover areas of opportunity.
Once you have measured your current performance, you may go deeper into your spending habits to uncover areas of opportunity. For example, if your DPO is shorter than that of your peers, you may want to work with your suppliers to extend terms, offering solutions such as supply chain finance that can facilitate the transition. Supply chain finance can potentially help your vendors access cheaper credit and get paid sooner, which in turn can help you hold onto cash longer or potentially reduce your cost of goods. Ask your bank to help identify suppliers that might be good candidates.
Ideally, your bank will help you take this approach with all of your suppliers, providing a complete view of their preferred payment methods and recommending solutions that align with those preferences. In many cases, you and your bank can target suppliers that are card or electronic payment acceptors to begin using such payments for larger purchases. This simple switch can drastically reduce the number of cheques you write, while helping your suppliers get paid more quickly.[[[PAGE]]]
Corporate treasurers are often ideally positioned to see across functional silos and identify projects that can benefit the entire company. Understanding that treasury, accounts payable, procurement and other departments may be pursuing competing priorities is an essential step toward managing working capital holistically.
In one common scenario, procurement may be strictly focused on improving pricing and expanding margins while treasury seeks to reduce transaction costs, increase visibility and extend cash flow by adopting card payments. Procurement may grow concerned that pushing suppliers to accept card payments might cause them to pass the costs back to the company—thus harming margins—but in reality many suppliers have already included the associated fees as a cost of doing business. By thinking holistically and communicating across silos, procurement and treasury can harmonise their goals to the company’s overall benefit.
Once you have identified the right goals and solutions, it’s time to develop a strategy for gaining buy-in and adoption across your organisation. Start by building the business case—which means fleshing out your rationale for pursuing the change. Collect feedback from process owners and functional experts, including KPIs uncovered during the benchmarking process outlined previously, and shape these metrics into a concrete scenario that articulates your company’s future vision. Leverage your bank to assist with determining the return on investment (ROI). Frequently, cost reduction is the primary metric for determining ROI, which might mean that a positive cash flow impact could be overlooked. But for net debtors, and even many net creditors, potential cash flow impact to their organisation is a valuable component to consider in combination with cost reduction and improved efficiency.
Next, build a cross-functional coalition that can support the change more broadly. Draw on internal process and technology experts and include representatives from risk, compliance, training, HR, communications and legal. This coalition should develop a change management plan that complements the technical and operational plans, including how you will communicate progress, recognise contributions, address resistance and monitor ongoing progress.
Ongoing focus and commitment are critical to long-term positive change.
Prior to implementation, engage senior executives to rally your people, remove obstacles and emphasise the organisational importance of the project. Ideally, senior stakeholders will be visible champions that play an active role. Use your business case to equip these executives with a fact-based, quantifiable rationale that will persuade the broader organisation to support your plan.
Once implementation begins, conduct regularly scheduled meetings with your coalition, senior executives and the broader work team. These meetings provide a forum for surfacing challenges and making time-sensitive decisions to maintain momentum. Enable sceptics and dissenters to express their ideas, develop thoughtful responses that address their concerns and quickly communicate wins by recognising valuable benefits and contributors.
Ongoing focus and commitment are critical to long-term positive change. Post-implementation, measure your KPIs at regular intervals, to make sure you’ve met your goals. If there’s a gap, analyse the root cause and decide how you’ll address it. Conduct post-mortem surveys to learn how your people feel about the project and codify ‘lessons learned’ that you can use during your next transformative change. And lastly, share the outcome with your team by publishing the KPIs and celebrating successes.
In an improving economy, optimising your working capital can be a powerful way to generate cost-efficient funding for your growth initiatives. The examples described in this article—switching from costly paper-based payments to electronic solutions and extending payment terms by enrolling your vendors in supply chain finance—are just two of the many ways you can boost working capital. As you examine your overall payables structure in greater detail, you may find additional opportunities to unlock cash.
Above all, work with a bank that can help you understand your data, align your company cross-functionally and take a strategic approach to managing change. The potential benefits can constitute a significant return on your investment and help advance your growth plans.
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