Working Capital Optimisation, The New Imperative For CFOs
Working Capital Optimisation is a top-of-the-agenda consideration for most CFOs. In an effort to derive competitive advantage, finance managers are exploring a range of new options that support their working capital requirements.
Working capital optimisation is today a high priority for CFOs and other finance executives evaluating ways that go beyond traditional forms of finance. This is more so in a global economic environment that appears to be on the mend, though in fits and starts.
In their effort to derive competitive advantage, finance managers are exploring a range of new options that support their working capital requirements—ranging from supply chain finance, trade receivables securitization, factoring, among other ways— to keep their organization well capitalized.
Indeed, Working Capital Optimization (WCO) is a top-of-the-agenda consideration for most CFOs.
A well-capitalized firm is the mark of a robust and efficient organization. While it sounds very simple in theory, the operational details of Working Capital Management (WCM) can become very complex due to immediate business environment of organization. Working capital optimization is all about optimizing trapped cash in all the three areas: Payables, Inventory and Receivables.
Of all three, inventory management is perhaps most well defines having seen a lot of attention and focus. Several renowned corporations have employed and pioneered several approaches and techniques to establish best-in-class and best-in-industry benchmarks.
Let’s consider the two other areas that are beginning to find their moment in the sun – payables and receivables.
Most CFOs use payables as a very effective WCO tool today. Technology has helped improve processes significantly with the availability of world-class payables systems. However, technology is as good as the implementation and issues still remain, including, for example, mismatched timelines, duplication of vendors, and different terms for the same vendors, among others.
Many organizations have taken a view of payables as a non-core activity, engaging external partners to perform the task for them with clear guidelines laid out for delivery.
On the other hand, receivables are one of the most significant and yet most underrated part of WCO, the latter because it is still seen to be a part of business operations, which might not be the case actually.
CFOs routinely grapple with this challenge of WCO with almost no control on the levers to control or manage it. In recent times, there have been some assertions from CFOs on the way forward for this issue.
Management of receivables is a science in itself and many industry segments have developed robust and remarkable processes and systems. Consumer product companies and financial services firms, for example, have highly-developed processes backed by technology to ensure better control on the AR. However, the story is very different with organizations who sell in the enterprise or business-to business segment.
Collecting is a rather tedious activity in the enterprise segment. Multiple stakeholders are involved in the process and that also makes it a very extensive task. Due to its nature of business, enterprise collections often tend to be driven by clear deliverables of SLAs (service level agreements) signed and the terms and conditions of purchase orders. Clear documentary proof at all stages for all deliverables are usually the norm to stake a claim for payments.
It begins with generating an invoice, which could contain multiple SKUs with multiple quantities and associated services. The more complex the project is equally complex is the invoice. Then there is of course the matter of associate tax structures and the need to segregate the invoices depending on the different types of work completed – for example, civil, electrical, services. This can become very complex and requires dedicated and specialized resources to perform flawlessly.
Delivery—or a perception of the kind of delivery—of services and products as per agreed upon SLAs is the biggest hurdle in the entire receivables space. The majority of customers would point towards issues during the payment process and significant time and effort is spent to ensure customer satisfaction, which often becomes the most tedious task given the need for coordination across multiple departments.
Many organization believe, and truly so, that the sales process is not complete until the payment is realized. And, hence, the Key Account Manager, or the sales person, is often tasked with collecting the AR on time. Mostly, the variable payout is linked to timely collections. However, looking at operational efforts needed to ensure collections, many a time, the sales person starts making errors, inadvertently slipping up, and leading to delayed payments. Quite often the collection call is also combined with new business calls leading to a clash of operational and business focus. Underwriting a customer for credit is also a function of inputs from the sales team and this has an inherent conflict of interest built into it.
Organizations have realized the importance of separating credit from sales and have started doing it. They even have started putting together teams to focus on collections. This team, while being a part of the CFO’s overall responsibility, also has a bearing on the entire organization’s growth. While CFOs do understand that this is not a core activity, they would like to develop in-house expertise to negate the impact of the lack of choices to outsource that has hampered the plan otherwise.
If there is one activity which can benefit significantly from outsourcing, it is receivables. As it sucks out the bandwidth of the core employees of the organization, the need to have a partner to deliver on this count is the need of the hour. About 22% of human capital in any organization is involved in the collections process, directly or indirectly. Outsourcing this activity can lead to significant productivity of the full time employees.
Organization should work on developing good credit control systems and processes which would use the feedback from the field teams to fine tune the terms during the process of sales to a customer. These credit controllers should focus on developing models which provide accurate inputs to sales/contract management staff for pricing.
This has to be the core area for any organization and developing it would yield dividends in the long run. However, the process of collections at the ground level is an activity which can benefit greatly from outsourcing.
There are organizations today that have forayed into this niche space offering solutions which can significantly free resources to be deployed to more productive work within the organization.
Choosing the right partner would provide the right benefits for growth. CFOs should look at firms which can own up the complete collections delivery and work seamlessly within the organization adding value. As the outsourced firm represents the organization, due diligence in terms of the quality of people employed, processes being followed and most importantly the ethical and compliance framework should be evaluated thoroughly before finalizing.
Today a CFO’s work does not stop with finance. In fact it begins with it. The need now is to be a complete business manager and not a bean counter. CFOs have realized this and are embracing the new imperative, adding significant value to organizations they represent.
In keeping with the adage that says change is the only constant, in an economic environment of continuous ferment, there is a growing need for “complete managers” who can manage this change well. Our new CFOs are truly answering that call today.