Working Capital Optimisation
Board members are aware that efforts to improve working capital can often be dogged by internal process problems that are systemic, invisible and have an ongoing negative impact on the business. Though the symptoms are recognised, when the root causes are in many parts of the organisation they are harder to pin down and eliminate. Collectively the board needs to provide the impetus to find out how robust the processes are as it is very likely that an investigation will uncover real value draining away. And it's not just the mechanics of processes that need improving. Behavioural issues have to be addressed; an area that is often at best in the peripheral vision. But people's attitudes to suppliers and customers have a large impact on how the whole process chain of materials and services interact during both the good times and particularly the hard times, when cash flow and working capital are under strain. Working capital optimisation is often seen as the responsibility of the CFO though the CEO will be held accountable for any poor corporate performance. But the reality is more complex as working capital is influenced by people in every function. The art to making a real difference is to find ways to engage everyone in using appropriate tools to analyse and improve the position. Our working capital optimisation approach achieves this outcome. Reverse flow analysis Reverse flow analysis can be summarised as tracking: a) Customer's cash back to order, tender, quotation, b) Supplier's payment back through to Purchase Order, c) With Work in Progress being at the pivot point of reverse flow analysis. Working with client team members the business is analysed 'against the flow' that delivers outputs to customers. In other words the principle we adopt is to understand the major issues at the end of the business (ie difficulties with Receivables) and uncover the possible root causes upstream in the processes. Continuing further upstream uncovers more upstream problems in the same parts of processes previously identified or in completely different areas and functions. The severity of the root cause will also be assessed (ie High, Medium or Low). For example a problem with trying to collect cash after invoicing may be due to poorly defined terms in the contract. At various points upstream the reasons for a downstream problem should start to become more apparent and thus solutions to the problems will start to form. At each stage of the working capital optimisation analysis we use our check lists to assess the process and look for issues and root causes of problems. Team members share a 'helicopter view' of the entire scope which exposes stage to stage issues and provides the evidence to develop ideas to make improvements that together meet the overall working capital business imperatives that are the objective of the project. A financial model of the current cash flows is also prepared. Later steps in the project use the financial model as the basis to assess the risks and benefits of proposals to change processes, terms of business and the like when considering options to improve working capital. The team models the impact on working capital of making the improvements and assesses the risks and benefits of making various changes as well as taking account of the level of difficulty, cost, timing and so forth of making the changes. Some decisions to work in a better way can be implemented early on. Other changes will take longer and may require multifunctional teams to be set up. We bring a disciplined approach to record proposals, to develop business cases where needed, and to track implementation. We disaggregate the high level financial model to create a series of KPIs for various stages along the Working Capital model of the business. The rigour in monitoring these KPIs in each part of the business provides the Executive Team with the assurance that the stretching goals in the strategic plan concerning working capital optimisation will be delivered.