This is the third in a series of three blogs focused on how to develop and implement an effective working capital optimization initiative. Our last blog concluded with options for achieving internal alignment within procurement, finance, and treasury, with the goal of optimizing working capital. Here, we’ll look at the importance of change management.
Implementing strategy through teamwork
There is an old saying, “If you want something done right, do it yourself.” This wisdom makes a lot of sense if you are completing a simple task where the results benefit solely you. But what if you are implementing an efficiency project for the betterment of your entire organization?
For these monumental tasks, one person cannot simply do it alone. Achieving project success within your organization requires a team, a plan, and the leadership to effectively coordinate work efforts. Only when these elements are in place can you follow your approach, execute the options at your disposal, and then unlock project benefits on behalf of your entire organization. This means getting stakeholder buy-in both across your organization and with targeted suppliers.
Gaining executive buy-in: why now?
Your organization’s success in executing process-efficiency improvements is as critical now as ever. That’s not because your market has changed, but rather because your competition (global or domestic) is becoming more resourceful with how they manage people and working capital. The tools available for becoming more efficient are now commonplace and continually being enhanced. Between lean training programs, rigorous adherence to best practices, and best-in-class finance and financial technology products like procurement and treasury workstations, continuous improvement is now a way of life. Failure to react to this new dynamic means your industry peers will continually generate more revenue and income with less working capital.
Gaining management buy-in: where to focus?
Through the monthly internal business-review process, most organizations are generating management reports to benchmark key financial indicators like gross margin, the current ratio, the cash conversion cycle, return on capital employed, and other working-capital metrics vs. prior periods. This is a best practice to monitor and manage continual performance improvements within the organization. But how many organizations are benchmarking these same metrics against the average for their industry or even against their peer group? This is truly the starting point to understand how efficiently your company is managing working capital today, across each participating function.
Gaining staff buy-in: getting started
Before kicking off an optimization program, the working capital steering committee should perform an assessment to understand what is at risk and what is the prize. A thorough assessment will take time to perform, but can easily be outsourced to a professional services firm that specializes in this practice. This exercise is central to explaining what is at stake and why full internal commitment to the program is essential. Key components of the assessment will be:
- How efficient is the procurement department in processing purchase orders vs. published benchmarks?
- How efficient is the accounts payable or shared services department in processing Invoices vs. published benchmarks?
- Has your organization performed a concentration risk analysis to ensure that your supply chain will not be adversely disrupted if one supplier suddenly raises prices or fails to perform?
- How adept is your organization when negotiating standard or discounted payment terms with suppliers, given that there may be a number of providers competing to deliver the same product or service?
- How strategic or assertive is your organization in taking discounts?
- Does your organization periodically review bank pricing vs. published benchmarks?
- What financial products (if any) has your organization leveraged to encourage discounts or extend payments?
- What financial technology (if any) is your organization using to achieve the best pricing while maximizing processing efficiencies?
- Have you recently performed a gap analysis of your key working-capital performance indicators vs. your peers?
- Given these key components of working capital, what is the value to your organization if your company could perform at the upper end of these benchmarks by initiating a working-capital optimization program?
Gaining supplier buy-in: crafting your communications plan
Now that your organization understands the value that can be unlocked from a working-capital optimization program, it is time look beyond your four walls and craft a strategy predicated on the results of your working capital assessment.
Segmenting the vendor master is critical:
- Segment vendors by whether they constitute direct or indirect spend. (You may want to craft your strategy separately or together depending on your objectives.)
- Determine which vendors are strategic and sensitive or complement other suppliers. (Sacrosanct venders may be too risky for your operations to upset, while other vendors will aggressively compete for your business and be open to processing changes.)
- Rank sort the vendor’s annual spend along with their number of transactions. (Big-ticket vendors could be steered toward a dynamic discount program, while smaller high-volume vendors should always be paid electronically to maximize processing efficiencies.)
- Look at extending payment terms with vendors while also negotiating discount terms. (If your cash-flow cycle is seasonal, you might want to toggle between extending payments to vendors when cash is lean or taking discounts with excess cash.)
- Determine the most efficient method to pay certain vendors. (Small-transaction, repetitive payments should be routed via low-cost ACH or rebate-earning cards, while checks should be reserved for large payments.)
- Finally, to leverage your work on the above items, tailor your messaging and communications for your internal staff and external suppliers. Internal messaging should focus on reinforcing the value of a successful project and management’s expectation of compliance. External messaging should focus on your program’s goals and reasoning, the value of faster payments for suppliers, and your view that participating suppliers will enjoy preferred status in future sourcing and contracting activities.
This strategy of extending payments or cashing in on discounts, and choosing payment methods to maximize processing efficiencies or yield rebates, will begin to be captured in larger AP balances and lower product costs. Now you’re on your way to optimizing working capital.