Proactive working capital optimization

As freeing up cash has become a priority for businesses around the world, organizations are taking a creative approach to freeing up funds. Today it is recognized that a good place to look is within the company. This benefits any leader, from CEO down, with a clearer understanding of the company’s working capital management objectives.

1. The best people for the job

To find sustainable success, it is often necessary to make meaningful changes at all levels of the company – from a holistic view of the organization’s working capital objectives and strategy. Companies must make the most of what is available to them: harnessing the power of technology and choosing the best people for the job must be a priority.

Those leading the capital optimization project must understand the benefit of a sustainable supply chain and see value in making the organization a preferred customer for innovative suppliers.

Any working capital optimization project should involve several internal stakeholders from the outset:

  1. Treasury – to lead a cash optimization program.
  2. Purchasing – as a critical player in supplier relationship management, they must ensure that new arrangements are communicated positively
  3. IT – to connect new technical solutions with existing systems
  4. Legal – to rewrite contract terms and ensure new practices are in line with the law
  5. Accounting/Internal Audit – to ensure changes appear on the balance sheet
  6. Financial control – to monitor the impact
  7. AP/shared services – to make working arrangements with suppliers


2. Communicating with suppliers

Communicating with suppliers right now is vital, especially if your new optimization program needs their involvement – because changing a way of working to adapt new methods at the best of times can be difficult. Purchasing departments would generally assume this responsibility, supported by Treasury and the organization’s partner organizations.

Segmenting the supplier base is a conservative measure and allows you to ensure that messages can be communicated in a way that works for the supplier. For example, high-spend suppliers may require more regular communication than long-tail suppliers.

3. Choosing the right approach

First and foremost, it is important to be clear about your goals from the start of the project. Failure to identify the magnitude of the opportunity for working capital optimization can lead to short-sighted and unambitious goals, resulting in a program that delivers no significant value.

Tactical vs Strategic

It is also important to distinguish between a tactical and a strategic approach to working capital optimization. The differences between the two is not just semantic.

A tactical approach — such as using tools such as reverse factoring or purchasing cards on their own — can allow companies to address specific issues, such as mitigating the impact of extended payment terms on suppliers. However, tactical measures cannot deliver the full potential of the supply chain opportunities.

To make more meaningful change, companies need to focus on more strategic objectives:

Be clear about financials

You may lack a detailed understanding of your suppliers’ financial position, but the right digital tools can give you a clear picture of both your own working capital position and that of your suppliers.

Enable flexible levers

You are looking to improve working capital, capture more early payment discounts, get better returns on excess money, improve margins or de-risk the supply chain. Or you may be looking for all these things. Either way, you need a flexible solution that can help you achieve your goals.

Communicating between departments

The goals of different departments can often be misaligned. By working together in a cross-functional team, goals and business strategic objectives can be aligned.

Include suppliers in your strategy

Suppliers should not be an afterthought in a working capital optimization program. It is supply chains that compete, rather than individual companies – so a successful cash flow optimization strategy must include all suppliers.

Take a long term vision

Any working capital optimization program must be flexible enough to adapt the source of funds as the needs of the business change. For example, being able to switch from a third party funded SCF program to a self funded dynamic discounting program. However, this should not interrupt the supplier experience. In our most recent supplier survey, 56% of all suppliers, both small and large, were interested in requesting early payments, with 34% of respondents citing cash flow management as the top motivation.

4. Partner selection

Check that you and your potential partner’s goals are aligned. In terms of technology, it’s also important to look at factors ranging from ease of use and the availability of human support to whether the included features add value.

Also, your partner should be able to give you insights that might not be available otherwise. For example, AI technology can proactively identify the best time to make early payment offers to suppliers. The business case should be built on a ROI that takes into account the value the partner brings, rather than cost alone.

Read the next chapter Ensuring sustainability.

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