How to Manage Working Capital in a Disruptive, Dynamic Environment
Leaders are already doing their best to manage an increasing list of business risks and disruptions paired with those enduring from the pandemic. For CFOs, cash management now sits as the top priority because of many factors, including increasing inflation, interest rates, energy costs, labor scarcity, and global complexity due to the Ukraine/Russia conflict and potential broader sanctions on supplier nations. In addition, global economic growth has slumped to a one-and-a-half-year low at the start of this year, while emerging markets face curbed manufacturing and output for the first time in months, and worsening pricing pressures reveal more hawkish tones among central banks globally. As these factors cause a mandatory focus on cash management, leaders need to tap new and creative sources of capital.
57% of company executives expect liquidity needs to increase through the first quarter of 2023, and
At least half of executives will prioritize optimizing working capital in 2022, and it is likely that an even larger share of leaders already prioritizes working capital management this year.
Source: CFO Survey Report by Allianz Trade
Unlocking cash from a company’s working capital cycle is the lowest-cost sustainable capital available to most businesses in the current economic environment. Careful and continuous management of cash is paramount to navigating uncertainty. It enables businesses to be nimble and proactive in optimizing working capital.
The activist working capital organization
Benchmarks are an excellent tool to provide an initial scan of the art of the possible, but they should be viewed as a starting point. High-performing, proactive organizations continually evaluate and optimize activities that unlock cash and tangential value. These organizations are not distracted by aspirational targets or misapplied pressure and realize that sustainable improvement requires the right priorities and organization, including:
- Internal structure
- Data fidelity and access
- Functional alignment with high-performing peers will illuminate opportunities to improve controls, accountability, and execution.
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.
Key questions for activist working capital managers are: (1) are clear lines of organizational authority and accountability established to execute recommendations? (2) are sales, operations, and cash management priorities appropriately aligned? (3) is the sales and operations planning (S&OP) process occurring frequently enough, provided with accurate data, and are all stakeholders enabled to take proper action? and (4) is data fidelity sufficient to support appropriate key performance indicators (KPIs) and recommendations?
Developing a working capital blueprint
Sustainable working capital improvement requires a vision and comprehensive plan that defines common functional goals and details the necessary framework required to support execution.
A working capital blueprint provides the future-state framework for organizational structure, critical processes, and appropriate systems tools that support both short-term and long-term execution of Working Capital optimization.
The blueprint combines elements of a charter and a future state design:
The Working Capital Blueprint
A future-state framework for organizational structure, critical processes, and systems to support and optimize working capital.
Defines cross-functional goals and objectives: intersects finance, operations, sales, and supply chain stakeholders
Establishes operating and service delivery models
Identifies supporting technology requirements
Creates appropriate KPIs and reporting
Initiates business process standards
Establishing 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.
Effective Working Capital Levers
Order to Cash
Order capture, invoice cycle time and accuracy, accounts receivable and collections management
Integrated Sales & Operations Planning
S&OP design and implementation, customer and product segmentation, virtual demand and sales forecast
Aged inventory liquidation, stock optimization, supplier management
Recap: how to move the needle and mobilize activist working capital management
An activist approach to managing working capital involves:
- Going beyond industry benchmarks to get deeper visibility into clients and products, to establish new, appropriate targets and objectives for working capital
- Identifying a path to becoming a forward-looking, agile, activist working capital organization by assessing the organization’s current capabilities in structure, reporting, accountability, planning processes, and data integrity
- Synthesizing this information to create a future-state working capital blueprint that formally documents structure, operating model, technology, and controls/governance
- Developing a proposed action plan based on key needle-moving areas, and for each activity, establish clear targets, milestones, owners, and accountability
Learn more about strategies for working capital management by watching Riveron’s related Ask The Experts Webinar.