Working Capital Optimization

Topics: Accounts payable, Business intelligence, Accounts receivable Pages: 5 (1375 words) Published: December 18, 2012
profit performance

David Giat Business Analytics & Advisory Services

Working Capital Optimization: 11 Lessons for Improving Payables If you’re thinking about working capital, you aren’t alone. Facing uncertain demand and constrained credit markets, CFOs continue to focus on building and maintaining their companies’ cash positions. Working capital optimization (WCO) is back, but this isn’t your father’s WCO — the environment and tools have changed. Today it is more important than ever to explore the sources of leverage with your suppliers and customers, to use analytical approaches to identify precise opportunities, and to establish processes for managing through sometimes difficult implementations. The basic levers have not changed. While Inventory and Receivables are equally important to the WCO equation, Payables is often more within a company’s control and can be extended without making fundamental changes to the business. There are many ways to extend Days Payable Outstanding (DPO). The best strategy is one that finds the right blend between best practices, company culture and the unique needs and requirements of each supplier and purchase category. What’s New About Working Capital Optimization Today? • Consolidation among buyers has changed the balance of power in many industries • Data availability and accessibility enables more informed negotiations • Advanced technology supports analytics that offer actionable insights • Strategic sourcing is now mainstream with proven, welldocumented methodology

Lesson 1: One function needs to drive
DPO is part of the Purchase-to-Pay cycle, and although several functions have responsibilities related to DPO, in many companies it isn’t clear who has the bottom-line accountability to drive change. A/P Shared Services owns the data needed for analytics and may already understand the opportunities. Purchasing owns the relationships with suppliers. While either Finance or Purchasing can lead, one of them must, and success


stories exist for both models. For one national bank, two rising stars in Procurement saw the DPO initiative as a career boost that would also help the company through tough times. On the other hand, a global retailer’s shared services VP saw the DPO initiative as a natural extension of his organization’s transformation.

Lesson 2: A CxO should be the sponsor
Because a DPO initiative spans functions, it can devolve into turf wars or die from lack of resources without consistent, high-level support. For one national grocer, it was the CEO who sponsored the initiative—securing resources, driving decision making, leading steering committee meetings and even meeting with key suppliers. A dedicated project manager, cross-functional teams organized by category, and senior-level participation on the steering committee round out the program structure.

Lesson 3: Break it down by category
The business case and strategy may differ from category to category. Run a pilot of a subset of suppliers to calibrate the approach and build credibility for the program. Consider key metrics other than DPO, and measure the impact on these metrics under a variety of approaches. An aggressive strategy will yield greater DPO improvement but may come at the expense of supplier relations. A less aggressive approach may yield smaller cash benefits but will also support other parallel objectives. For example, a CFO may also want to reduce the number of payment terms or implement electronic payments as part of the initiative.

Lesson 4: Form a Purchasing-Finance alliance
Suppliers aren’t going to accept these changes without pushback. They understand what matters to Purchasing and it usually isn’t payment terms. To avoid the “Mom vs. Dad” tactic, create a training program for all supplier-facing personnel including scripts, FAQs, role-playing and a well-documented escalation process. This preparation provides clear guidance and keeps all internal...
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