Although there are already various approaches for temporarily fixing cash leaks by taking a closer look at negotiated terms, invoicing, or payment processes, most companies struggle to implement working capital as a philosophy within their strategy and daily routines.
Current challenges such as the latest material shortages, price increases, and growing scarcity of skilled labor make it even more difficult for companies to leverage their financial resources effectively. Instead, past failings threaten to reach a tipping point where additional debt suffocates any potential business case as a consequence of the gloomy economic prospects in combination with the rocketing interest rates of recent months.
These times can become a golden age for best practice companies who have already developed an organizational framework and a supporting toolbox. However, companies without readily available tools and methods will eventually lose time and money. Either they must start from scratch, or they fail to use the full potential from funds tied up in operations. Taking a closer look at best practice examples can therefore help to speed up the launch: A global beverage manufacturer has, for example, established WCM as one of the key levers for improving free cash flow – one of its key metrics in the corporate strategy. Establishing free cash flow as a strategic key metric makes it a focus topic for the entire management team and especially the CFO. Achieving the strategic free cash flow goals was positively recognized by the capital markets, which reward competitive working capital ratios.
Inefficient use of working capital occurs in many places throughout value-generating processes. Detected insufficiencies can be dealt with in two steps: First, problems are identified, analyzed from a technical perspective, and then fixed in the short term. This typically happens by task forces and dedicated projects that concentrate on quick fixes. Typical quick fixes can be factoring or collecting outstanding debt and selling off obsolete inventories.
The second step must then focus on implementing WCM in the entire organization. This often requires profound adjustments within the organizational model and steering mechanisms, carefully considering any implications, e.g., on corporate culture. Since these changes affect the entire organization and not only sub-divisions within the finance department, they require far more finesse to excel in this step. However, if conducted correctly, this action is the crucial key to a successful and sustainable WCM approach. Coming from an end-to-end-view, critical processes in most cases involve interfaces with stakeholders in procurement or sales. To avoid complications during the roll-out of developed concepts, it is important to involve them at an early stage and make sure they are fully committed and contribute to all concepts and potential changes of roles and responsibilities. The set-up of cross-functional “reference point alignment sessions”, for example, has provided fruitful discussions in the past and helped to identify roadblocks ahead.
The major challenge to overcome when implementing a successful WCM approach is not only to extend the organizational model in a way that reflects the relevance of cash-related topics accordingly, but also to watch out for any resistance within existing management and leadership structures. The establishment and operationalization of steering mechanisms accompanied by the implementation of transparent key performance indicators can only succeed with sufficient support on all hierarchy levels. Therefore, it is critical to get all key stakeholders on board in an early phase and plan related change and communication activities in advance. This applies not only within finance departments but also in the neighboring departments along the value chain. The three dimensions of the cash conversion cycle (Fig. 2) indicate related counterparts within sales, procurement, and production that must be taken into account in order to ensure end-to-end process consistency.