Working capital optimization: deploying a solution

October 12, 2018 Juhie Kapoor
 
When undertaking a working capital optimization project, it’s essential to deploy your solution effectively so that you can achieve the desired outcomes. In particular, you’ll need to include all relevant stakeholders in the implementation and communicate with them effectively. 
 
While this may sound straightforward in theory, this aspect of the project can be challenging – particularly for globally dispersed and decentralized organizations. A trusted partner can support you in this, but your organization will still be responsible for strategic decision-making, so you should not delegate responsibility completely. 
 

Who needs to be involved?

The project will need to include a number of internal stakeholders from the outset:
  • Treasury will often – but not always – take the lead in a cash optimization program.
  • Procurement owns the relationship and the payment terms with suppliers and is therefore a critical player in ensuring that the new arrangements are communicated in a positive way.
  • IT will ensure that the new payment portal is fully connected with existing ERP or other financial systems.
  • Legal may need to rewrite contract terms and ensure that new payment practices are in line with local legislation – as well as with any relevant codes of practice.
  • Accounting/internal audit will need to be involved because incorrect structuring could change the way in which trade payables appear on the balance sheet.
  • Financial control may also see an impact as new systems could create control gaps which undermine the integrity of the organization’s financial reporting.
  • AP/shared services will be affected by the introduction of new payment portals and different working arrangements with suppliers.
     

Communicating with suppliers

Roles and responsibilities will need to be assigned to each stakeholder. Arguably the most challenging role is that of communicating with suppliers and encouraging them to enroll onto the program. Procurement generally takes on that responsibility, supported by treasury as well as by partner organizations. 
 
During the communication process, it may be prudent to segment the supplier base so that the right messages can be communicated in the right way. For example, suppliers which represent a high spend may need more regular communication than long-tail suppliers.
 
In order to tailor the message for key suppliers, it’s important to pinpoint why particular suppliers may be interested in taking early payment. Different suppliers may be attracted to the opportunity for different reasons, such as meeting their working capital needs, reducing DSO and achieving greater predictability over receivables. Other motives may include the opportunity to take advantage of favorable finance rates, as well as the ease of use offered by the portal.
 

Integration and engagement

There are other points to consider when deploying a program. For one thing, your SCF platform will need to work alongside several other IT systems, including your ERP system – so achieving the deepest possible level of integration is essential.
 
Your partner’s level of engagement may also be key to the success of your program. Rather than sending you generic file format specifications and requests for data, a fully engaged partner will work closely with you to achieve the results you are looking for.
 

It’s never over

Another point to bear in mind when deploying a solution is that enterprise-wide cash optimization is an ongoing mission. You’ll need to make sure that success sticks, and that people don’t slide back into their old ways of working. 
 
For example, when new suppliers are onboarded – or when new people join procurement – there may be a risk that specific suppliers are granted exceptions, undermining the goal of achieving standardized payment terms across the company. It’s essential to remain vigilant and ensure that the great processes put in place continue to be applied rigorously.
 
It’s also worth bearing in mind that the competitive advantage you have hopefully achieved with your game-changing strategy will not last forever. As your competitors start to adopt similar strategies, the gap may narrow – so it’s important to keep reviewing the project and exploring any new opportunities that may arise for value creation.
 

A strategic role

In fact, we would argue that corporates should recognize the need for a new corporate role: that of enterprise cash optimization officer. While bringing together different functions, this should be a strategic role which is involved in developing a plan, securing sponsorship from the CFO, delivering the plan and reporting on the results – as well as spearheading a culture change and building cash consciousness across the organization.
 
The person in this role would therefore need to look at how stakeholders’ performance metrics and reward mechanisms act as incentives or disincentives. They would also need to take responsibility for a system of governance embedding the desired practices, thereby making it necessary to argue a business case before any exceptions to the standardized rules can be agreed.
 
The final blog will look at the pitfalls you’ll need to avoid when adopting a working capital optimization program.

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Working capital optimization: measuring success
Working capital optimization: measuring success

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