Working capital optimization: choosing the right approach

September 20, 2018 Juhie Kapoor

Not all working capital optimization projects are equal. Once your company has decided to tackle this area, a number of decisions will need to be made. From setting out your objectives to adopting a strategic approach, here’s what you need to consider:
 
Set clear goals
 
First and foremost, it’s important to be clear about your goals from the beginning of the project. Failing to identify the scale of the working capital optimization opportunity may lead to short-sighted and unambitious goals, resulting in a program which fails to deliver significant value.
 
When setting your goals, benchmarking against industry practice can be invaluable. While there are many sources which provide information about payment practices in different industries and locations, this information typically covers a wide range of different types of payables. Sources based on actual payments data are likely to provide a more granular level of detail. 
 
Companies should also consider their entire supplier base when planning a program, factoring in the financial position of the players in the supply chain and the cost of capital they face.
 
Tactical vs strategic
 
Also important is the need to differentiate between a tactical and a strategic approach to working capital optimization.
 
The differences between the two not just semantic. A tactical approach – such as using tools like reverse factoring or procurement cards in isolation – can enable companies to address specific issues, such as alleviating the impact of extended payment terms on suppliers. However, tactical measures cannot deliver the full potential of the supply chain opportunity. In order to achieve a more meaningful change, companies need to focus on more strategic objectives: 
  • Gain true visibility of your cash position across the company and the supply chain. You may lack a detailed understanding of your suppliers’ financial position – but the right digital tools can give you a clear view of both your own working capital position and that of your suppliers.
     
  • Enable flexible levers. You may be looking to improve working capital, capture more early payment discounts, get better returns on excess cash, improve margins or de-risk the supply chain. Or you may be looking for all of these things. Either way, you’ll need a flexible solution that can help you achieve your goals.
     
  • Develop strong, digital payables processes. Early payment programs cannot work effectively unless the buyer can authorize suppliers’ invoices promptly or execute timely payments. As well as a suitable digital platform, you’ll need to embed best practices in the minds of everyone involved. 
     
  • Break down silos. The goals of procurement and treasury are often misaligned: treasury tends to focus on deploying cash for maximum impact at low risk, while procurement aims to reduce purchasing costs. By collaborating in a cross-functional team, treasury and procurement can align their goals with corporate strategic objectives.
     
  • Include suppliers in your strategy. Suppliers shouldn’t be an afterthought in a working capital optimization program. It’s supply chains that compete, rather than individual companies – so a successful cash flow optimization strategy should encompass all suppliers.
Partner selection
 
Once you’ve set your optimization goals, another crucial step is to select the right partner for your program. Partner organizations such as fintech platform providers, finance providers and working capital consultants can play a vital role in helping you measure the size of your opportunity. However, it’s important to work with organizations which have the skills, expertise and experience needed to help you achieve your goals.
 
When choosing a partner, you’ll need to take a number of considerations into account. For one thing, you should ascertain whether the partner’s goals are aligned with your goals. Where technology is concerned, it’s also important to look at factors ranging from ease of use and the availability of human support to whether the functionalities included deliver added value. 
 
Likewise, your partner should be able to give you insights that may not otherwise be available. For example, AI technology can proactively identify the best time to make early payment offers to suppliers. 
 
Last but not least, the business case should be built on an ROI that considers the value the partner brings, rather than on cost alone.
 
The next blog will look at the metrics you can use to measure the success of a working capital optimization program. For the full guide click here
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