Working Capital happens to be one of the highest focus and priority areas, attracting considerable attention from CFOs, Market Analysts and Stakeholders at large. Having a healthy working capital position is the key to your company’s financial position and stability. You are looking to reduce your need for working capital, reduce costs and improve your financial supply chain. Looking at the future your business would benefit significantly if you could:

• Diversify funding
• Improve financial ratios and return on capital employed
• Improve cash flow and optimise working capital
• Realise pricing benefits
• Improve risk management

What in our view are some of the common pitfalls in managing of Working Capital?

• AR issues arising because ERP systems do not support highly efficient OTC workflow, are difficult to operate and even harder to adapt to business needs
• Patchwork of manual tools (Excel, Outlook, etc.) and “tribal knowledge” to facilitate collections
• Delays in getting bill to the client
• Lacked visibility into DSO drivers and AR exposure indicators
• Inability to track customer payment behavior, as it reflects both risk levels and your ability to convert cash more effectively
• Delay in inventory turnaround
• Inconsistent payments terms of the suppliers

Best in class organizations measure performance among their functions, look for opportunities to improve processes, and educate employees on their roles in WCM. Metrics, measures and monitoring are fundamental to the change process.

 What kind of Analytics is useful for Working Capital Management?

The identification of relevant data, drivers and measures to enable effective decision-making represents the core purpose of managing working capital. Four findings about the best in class organizations relate to this vital area:

• They use data from an enterprise resource planning (ERP) system to inform daily credit and collection units
• They conduct real-time analysis of cash flow drivers to ensure reliable forecasts and optimize spare cash
• They measure, analyze and advise operating units on how to increase the return on working capital invested in operations
• They design custom measures of working capital that are relevant to their business models

Where can we help?

Our ‘Capital Guard’ (Analyst) could support in the following 7 steps which involves measuring and managing working capital successfully using analytics and metrics:

• Define metrics relevant to the organization
• Follow a timely reporting schedule
• Establish accountability for results
• Undertake a cross-functional perspective
• Provide frequent summaries for executives
• Automate systems for reporting and analytics
• Use benchmarks for process performance

Sample working capital benchmarks include:

• Return on Capital
• Working Capital as Percent of Sales
• Days Sales Outstanding (e.g., BPDSO [Best Possible DSO], ADD [Average Days Deficient] and DBT [Days Beyond Terms])
• Percent Past Due (e.g., to monitor the level of past-due invoices)
• Invoice Error Rate
• Days Inventory Outstanding/Inventory Turns
• Days Payable Outstanding (e.g., Aged Unmatched Invoices)
• Procurement Card Percentage of Spend

In one of the client’s instance, by simply tracking & displaying the results in a dashboard, our Capital Guard was able to bring down the Billing cycle by 30% in terms of no. of billing days delayed from its original time & review of payment terms across various vendors resulted in DPO improvement by +14 days for a large organization.