Another point to keep in mind when implementing a working capital optimization solution is that cash optimization is an ongoing mission. To ensure that success sticks, you need to make sure people don’t slip back into old ways of working.
For example, when new suppliers are on-boarded – or when new people participate in tenders – there is a risk that specific suppliers will receive exceptions, undermining the goal of achieving standardized payment terms within the company. It is essential to remain vigilant and ensure that the major processes that have been put in place are rigorously applied.
It’s also worth bearing in mind that competitive advantage won’t last forever. As your competitors begin to adopt similar strategies, the gap can narrow – it’s important to keep reviewing the project and exploring any new opportunities that may arise for value creation.
Avoiding the pitfalls
When going through major changes, keeping the business is key. How do you ensure that customers, suppliers and employees are all on board to see through the change? While managing existing relationships well and mitigating the change with adequate communication will certainly make the transition easier, a heavy-handed business-focused approach can also lead to bad press.
Shared benefits must be made available throughout the supply chain, ensuring compliance with voluntary codes of conduct – demonstrating compliance with corporate social responsibility towards your supply chain.
Companies should also be aware of other industry developments that may impact their working capital optimization practice. Avoid legal issues by thoroughly researching payment codes, guidance on dealing with SME suppliers, and local company codes.
A strategic role
In the future, companies must prioritize their new way of working. Strategic roles are crucial for maintaining new processes – whether overseen by a specific person or by multiple people as part of their existing role. Strategic roles would be involved in developing a plan, securing sponsorship from the CFO, delivering the plan and reporting on the results – and leading a culture change and building cash awareness across the organization.
The person in this role should therefore look at how stakeholder performance metrics and reward mechanisms act as incentives or disincentives. They should also take responsibility for a system of governance that includes the desired practices, making it necessary to argue a business case before exceptions to the standardized rules can be agreed upon.
Setting clear goals and KPIs is a great way to measure individual and collective success while better optimizing working capital.
Working capital statistics
The basic metrics used in a working capital optimization program are as follows:
- Days pending (DPO) – the number of days required to pay vendor invoices.
- Days sales outstanding (DSO) – the number of days it takes to collect payment from customers.
- Days of inventory outstanding (DIO) – the number of days taken to sell inventory.
- Cash Conversion Cycle (CCC) – the number of days that cash is tied up in inventory and receivables before being converted to cash, calculated as DSO + DIO – DPO = CCC. The lower the CCC, the more efficient the cycle. Some companies may have a negative CCC, meaning they receive money from customers before their suppliers are due.
While these basic metrics are helpful in a cash optimization strategy, they only tell part of the story. That’s because they focus solely on the organization’s working capital strategy and don’t consider the other strategic goals — or, indeed, the impact of a working capital optimization program on the supplier base.
Measuring program success
While the strategic objectives of the program should be considered the first measure of success, you can also use a number of other measures to assess whether a program has been effectively implemented and communicated to suppliers, and whether the offer has proved attractive to them.
Then, as the program rolls out, you can check how many vendors have been notified and how many have signed up. The difference between these numbers can shed light on how attractive the opportunity is to suppliers and/or how effective your communication has been.
Finally, measures related to AP costs can give you a clear indication of the success of the program. These can include the number of staff, processing error rates, the number of phone calls or email inquiries from suppliers, and the proportion of invoices processed on the platform. Particularly important is the speed with which invoices can be approved for payment: the longer it takes to complete the necessary three-way matching and unsubscribe, the longer suppliers will have to wait before taking advantage of any early payment options.
As with any new project, it is important to collect feedback to measure feasibility and success. Arrange to speak with people at all levels of the company to get a well-rounded view. The list of internal stakeholders to be involved above should serve as a starting point.
While meeting face-to-face can be difficult, setting up a quick online survey is relatively easy. Try setting one up for your colleagues to provide feedback, as well as one for outside collaborators like suppliers and manufacturers, too. This way you can honestly assess how the project works and where there is room for improvement.
Remember – with a new project, there will be teething problems. The way to work through them is to plan, communicate and listen. From there, you can build the foundations of something that really has the power to make an impact.