Article | Working capital management - not just a finance issue by Francois de Witte

|14-12-2016 | François de Witte |

When looking at the sales, conversion and procurement cycle, we should not only focus on the stated DSO, but also at the hidden DSO. In order to identify this, we must go much further to a complete analysis of the order to cash cycle, as illustrated by the following 6 examples:

Several companies do not manage their inventory efficiently
Quite a lot of companies still have a time lag between the moment that the goods and the services are delivered, and the moment that the invoice is issued
Several companies still issue paper based invoices. The postal delay will also increase the collection time. For this reason, I recommend to my clients to move to e-invoicing
When I worked with a car dealer, I realised that between the moment that the cars were delivered by the importer, and the moment that they were sold, there was a huge time lag
A marketing company struggled with the process of offers, leading to purchase orders, because the various participating units did not provide their time sheet and cost estimation in time.
On the inventory side, purchase of spare parts were done, even without having a duly executed purchase order of the client, and clients were not reminded in time to take delivery of the goods, resulting in higher stocks

Hence, when starting an assignment on the working capital management optimisation, one should not only look at the processes within finance, but at the overall processes.in the company. By analysing the detailed processes on the floor, you can better understand the drivers of the cash conversion cycle, and take some actions, such as:

Ensuring that procurement only purchase spare parts when they have a duly executed purchase order, with then required the advance payment
Making staff aware of the need to ensure a quick invoicing process
Understanding the possible resistance to new concepts such as e-invoicing and automated incoming document scanning
Identifying the triggers, which will make that the staff cooperates to reduce the order to cash cycle
Having a better alignment between the finance staff and the sales department on e.g. the credit risk and the payment terms
Make procurement more sensitive to treasury aspects. I have seen several cash risk companies who left aside the possibility of supply chain financing of discounting schemes, because the KPIs of both procurement and treasury were not aligned;

But overall, if you wish to succeed in optimising the cash conversion cycle, you need to ensure that the changes are embedded in the organisation by:

Explaining to all the participants the importance of working capital management and their contribution to it
Providing to the various participants KPIs in this area, which are monitored on a regular basis. In my recent assignment, we have put joint KPIs for the Sales Administration in prompt invoicing and in DSO terms
Ensuring also that there is an internal control on the procedures
Ensure that you have the correct tooling (e.g. e-invoicing, credit management, credit collection, etc.)
Having a regular review of the processes

We can conclude that an efficient working capital management is a matter for the whole company. Beside hard skills, you also need soft skills and KPIs to ensure that the processes are really embedded in the organisation.