Working capital optimization guide: 5 strategic changes
One of the main catalysts for transformation in modern business is cash: cash to fuel research, cash to fund acquisitions, cash to enter new markets. Too often, finances are stuck in the supply chain due to inefficient processes, assets or other resources. This has become particularly evident in recent times with the disruption of the supply chain and the effects of the Covid-19 pandemic. A working capital optimization program can be an opportunity to free up the cash needed to truly grow your business.
Five strategic changes are necessary when developing a working capital optimization program. They are:
1. Gain visibility into the company’s cash flow and supply chain
The financial health of a modern, connected business depends on its supply chain. Buying companies can often lack visibility into the financial health of their suppliers, so the threat of supply chain risk or customer fulfillment can arise unexpectedly. The state of the global market, unexpected changes in the industry, even inclement weather conditions can all impact the supply chain, and a lack of preparation for such events can be extremely problematic.
The right digital tools can allow a business to see both buyer’s and supplier’s working capital position across DSO, DPO, and DIO – the full cycle of converting to cash. A data-driven system can go one step further by comparing a purchasing organization’s spending to a live database of actual payment behaviors. This window on Supplier Health Indicators gives the purchasing company the information necessary to optimize the financial goals of its own business, as well as to improve the health of the supply chain.
2. Activate flexible “levers” to improve working capital
Companies set many goals for themselves when looking to improve their working capital. These include the optimization of working capital and cash generation; better returns on excess liquidity; improvement of the margin; reduce supply chain risks; and improving relationships with suppliers.
A purchasing organization should seek out a solution partner who can help you achieve many, if not all of these goals, while keeping an eye on future growth aspirations.
3. Develop strong digital invoicing processes
Even healthy businesses will struggle to deliver results if AP cannot provide accurate and timely invoice approvals or execute timely payments. A digital platform can help eliminate inefficiency and errors in this process.
4. Set up an interdepartmental committee
A company’s treasury department may want to deploy cash for maximum impact at low risk, while purchasing focuses on reducing purchasing costs. Finance prioritizes process simplicity, while IT prefers smooth integration with other systems.
It would be easy to leave one of these groups dissatisfied. Developing a solution that satisfies each department is the objective of an inter-departmental committee which aims to align their objectives with the strategic objectives of the company.
Using the right technology, that decision-making can be data-driven – using information that can help assess the scale of the opportunity, as well as the trade-offs the organization faces. The result will be common goals for working capital, cost reduction, and supply chain health that each team can understand.
5. Consider vendor buy-in and early adoption for working capital optimization
Too often, working capital programs are buyer-centric. The strength of the supply chain is the key to the performance of the purchasing business and to be truly successful, a cash flow optimization strategy encompasses all suppliers as well as the buyer.
A cash flow strategy should encompass vendor goals such as reducing DSOs, lowering financial borrowing costs, ensuring payment security, and better visibility and control of receivables.
