As a measure of corporate operating liquidity, the performance of working capital has always been a great indicator of whether the business is running efficiently. But one of our studies suggests that executives may be leaving a lot of money on the table.
In fact, the top 1000 companies, in total, have over US$1 trillion of improvement opportunity tied up in working capital. And if you look at all three elements of working capital – inventory, payables, and receivables – only two or three companies have consistently improved their positions year over year.
I joined Denise McGuigan, senior manager of SAP Package Technology for Deloitte Consulting, and Andy Baxter, manager of SAP Ariba Payables at SAP, for a thought-provoking discussion to further examine the complex issues around working capital and strategies to enhance its value. The roundtable was hosted on the March 20, 2018, live edition of “Financial Excellence with Game Changers.” The program, presented by SAP, is produced and moderated by SAP’s Bonnie D. Graham (follow on Twitter: @SAPRadio #SAPRadio). Click to listen to the full episode.
Greater transparency leads to optimized working-capital spend
With responsibility for managing inventory, payables, receivables, and cash spread unevenly across operational silos such as finance, operations, supply chain, marketing, sales, and procurement, many businesses are finding it difficult to fine-tune their working capital position. In essence, this all boils down to the need for more transparency. With access to cross-functional information on performance, positions, and priorities, the business can be more intelligent about making investments that yield better return, while spending less working capital.
Working capital improvement is – and will continue to be – a top priority for CFOs worldwide as they look for new ways to add value to their customers and shareholders while competing on a global scale. But as Andy warned, working capital optimization is vital for the whole company, and should be on the radar of the entire management team, not just the CFO and board. It really transcends finance and goes down to operations – truly a change management process.
Denise agreed, adding that reimagining working capital optimization can pave the way for the future transformation of the entire business, not just finance. “Considering the rapid advances in technology and finance, the business and IT must be aligned in a clear vision, as well as clear objectives and priorities,” she remarked. “Both sides have to understand what the ‘T’ in ‘digital finance transformation’ really means for the entire company.”
Creative thinking and technology bridge the optimization gap
Denise observed that most companies do not have a formal structure to manage it all. “For example, aligning policies and proxies with organizational talent, business systems, and information is critical. Working capital optimization is dynamic, and technology and data are significant drivers for solving many of today’s working capital challenges.”
Denise’s line of thinking is on point, considering the importance of technology in working capital optimization. As organizations grow and become more complex, they need technology to collaborate cross-functionally and make decisions by using information intelligently with the technology and systems available.
But at the same time, as Andy noted, the rapid pace of technology evolution is igniting a new era for this once-stable indicator of financial health. “Technology is changing so quickly that companies are forced to think differently about how they do things – and that’s hard for those doing things the same way for 30 years,” he said. “Working capital optimization doesn’t happen overnight. This effort is an evolution that needs attention on a daily and weekly basis.”
Crystal-ball predictions: Will businesses stop leaving money on the table by 2020?
While working capital can have a significant impact on a company’s cash-conversion cycle and future investments, many businesses are far from putting this financial asset to best use. Will they get it right by 2020?
From my perspective, it all depends on the business’s approach to working capital optimization and technology adoption. Over the next couple years, we will see more implementations of new technologies such as artificial intelligence and robotics. But the real question is whether the technology will be used wisely to leverage master data, collaborate across the company, measure metrics, and offer the right incentives.
In the show’s “Crystal Ball Round,” Andy qualified my instincts by noting that businesses will have no choice but to leverage technology to keep pace with shareholder demand. “Shareholders are going to demand working capital optimization as competition continues to heat up on a global scale – and technology is going to be a big piece of it.”
Denise predicted that machine learning will play a lead role in working capital management. “Machine learning will finally go mainstream, transforming businesses with out-of-the-box experiences,” she observed. “Personally, I do see a lot of transformational projects enabled by this technology, focused on different service-delivery and operating models, with a goal of optimizing working capital.”
: Check out this page to learn more about optimizing working capital to improve your bottom line.
Listen to the SAP Radio show “Optimizing Working Capital: Cashing-In for Your Bottom Line” on demand.