In a series of conversations with several Chief Financial Officers, Riveron sought to gain insight into their approach in handling the current business climate. Primary themes resonating from these discussions included company-wide agreement on objectives, immediate action supporting long-term growth strategies, and a fortified collaboration between finance and operations aiming at releasing working capital.

During periods of uncertainty, liberating cash from a company’s working capital cycle is both critical and cost-effective. Expert cash management becomes an indispensable tool for navigating through ambiguity, particularly as companies have traditionally relied on inexpensive debt.

How to move the needle in releasing working capital

Apply an “activist” approach to managing working capital:

• Foster an “activist” mindset within your company to ensure constant evaluation of working capital priorities and re-calibrating objectives.
• Establish a tactical playbook to identify and execute specific projects across the value chain and drive lasting improvements to working capital.
• Focus on what you can control by understanding where teams have direct or indirect influence over key behaviors affecting working capital.
• Drive quick, incremental change by identifying the focus areas with the highest and fastest ROI and communicating wins.
• Prioritize tracking and measuring working capital for visibility and progress against KPIs in the improvement journey.

Form an “activist” mindset

Addressing Working Capital as a near-term initiative can be problematic if improvements and working capital metrics slip, creating liquidity or growth challenges. Organizations transform from reactionary to “activist” working capital management by consistently recalibrating targets, leveraging real-time insights, and prescribing clear actions to operational and back-office teams. EBITDA and Working Capital can often compete for resources within a company, particularly throughout the Private Equity investment lifecycle, so it is important to understand current objectives while accommodating recalibration in a nimble manner. Lastly, if partners, whether customers or suppliers, do not support the Working Capital mission at your company, relationships may need to be evaluated for long-term fit at the executive level.

Establish a tactical playbook

Working capital optimization consists of a large pool of potential micro-projects: a properly scoped and prioritized set of contributing activities (the “playbook”) is essential to reaching targeted outcomes.

Projects should be selected through ranking criteria for potential activities, such as estimated return on investment (ROI), resource requirements, complexity, and timing, resulting in priority among opportunities. This ensures the most impactful and realistic opportunities are elevated and that tangible, needle-moving progress is achieved.

Focus on what you can control

Although components of a company’s cash-to-cash cycle are owned by external partners and can only be influenced, to realize improvements in working capital, businesses need to concentrate on levers that can transform their value chain network. This necessitates internal alignment, securing efficient processes and technology, and setting targets with clear accountability, both internal and external, for incremental progress toward those targets. To achieve and maintain a top performing working capital function, companies must consistently review key performance indicators (KPIs), facilitate incremental progress, and keep lines of communication open throughout the organization. Leveraging real-time insights, implementing definitive actions, and adopting an “activist” mindset are all critical in the creation of a tactical playbook that highlights priority projects vital to materializing working capital goals for the organization.

Drive incremental change & communicate across the organization

Improving the cash-to-cash cycle is not an overnight endeavor but rather a concerted effort by multiple teams staying focused and methodically contributing to the improvement of working capital. Driving meaningful improvement often involves cleansing, categorizing, and analyzing data to find opportunities and quick wins to capitalize on and conduct a root cause analysis on any deficiencies uncovered.  Once teams have prioritized focus based on an objective return on investment (ROI), regular check-ins must be established to convey wins and to foster collaboration across teams. Leadership can also align incentives to capital releasing goals, even ad hoc initiatives such as aged inventory liquidation.

Measure and report Working Capital & address KPIs often

DSO, DIO, DPO and Cash Conversion are often regarded as the most important internal operational metrics, so they must be visible to leaders at the highest levels of the organization. If external benchmarking exercises and internal trending indicate a delta between current and desired state, now is the time to make working capital a priority by including in a publicly conveyed and executive-driven quarterly or annual key metric, e.g., objectives and key results (OKRs). Ensure that actionably sized initiatives cascade down to the front-line team members, for example, incentivizing quicker invoicing of your Tier 1 Customers or formalizing regular Inventory and Safety Stock Optimization. Many companies fall short of executing on the story told by KPIs and simply report the status. To avoid this pitfall, implement action/result tracking for the affected groups within the working capital initiative.

Taking an assertive approach to working capital management means concentrating on controllable factors, giving priority to working capital, encouraging incremental change, nurturing an assertive mentality, and creating a tactical playbook for progress. By implementing these strategies, businesses can effectively optimize their working capital and drive long-term success.