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The Working Capital Opportunity You Need to Consider Now


Today, large U.S. companies are relying on cheap debt to fund their respective businesses.  That’s not a sustainable practice or long-term solution.

In a recent Treasury and Risk interview with the Hackett Group’s Craig Bailey, Craig stated, as the cost of debt increases, companies will begin looking for internal operating opportunities to improve working capital: (Days Payable Outstanding, Days Sales Outstanding, or Days Inventory Outstanding). Furthermore, Craig said that, “they should be getting ahead of it now, anticipating changes in the future and looking to improve their working capital position while they still have time.”

I couldn’t agree more. Companies are living on borrowed time, no pun intended, and there’s a window of opportunity to drastically affect the company’s bottom line.

So, what’s the opportunity from a strategic payables perspective?

Holistically, the financial value of a simple, certain and secure payables strategy that crosses organizational silos and breeds better collaboration between both buyers and suppliers is significant.

For instance, buyers can extend payment terms for substantial free cash flow, while suppliers receive low cost, on-demand financing via supply chain finance.  Buyers could also take advantage of early pay discounts, while their suppliers are collecting faster and lowering DSO.  In addition, buyers can move to a more scalable and secure payment process, reducing potential risk exposures.  With next generation electronic payment approaches, suppliers improve visibility into payment timing and get rich remittance information tied to those payments.

In essence, the foundation for strategic payables is better collaboration between buyers and sellers, to the benefit of both trading partners.

Now before jumping head first into a payables initiative, it’s worth your time identifying stakeholders in AP, Finance, IT, Procurement, Treasury, and related groups to help a working capital management project succeed.  These functional stakeholders will want to know “what’s in it for me” before they jump on board.

As Craig also mentioned, there are two common factors to sustainable working capital management projects. These are:

  1. Defining what’s being measured by the business and what are the targets
  2. Assigning accountability to the project

And these are spot on. To be picky, I would also add a third key component:

  1. Governance – who is the executive sponsor?

Potentially the most critical success factor is identifying the executive sponsor for this initiative. Most likely, it will be the CEO, CFO, treasurer, or some member of your senior management team.  And if you engage Mahogany Road, don’t simply state, “Here are the savings.”  Be more precise.  Perhaps share how the program can save several million euro or dollars in discounts, which hits the income statement and reduces costs of goods sold.  Or how this can free up tens of hundreds of millions in working capital by extending terms on the balance sheet.

What’s important is to identify the payback and relevant benchmarks for your industry, and tie it to your income statement or balance sheet.

There’s another key stakeholder here: the lead project sponsors.  This person builds and fosters relationships across the organization and unifies siloed departments because everyone has to be on-board.  Their relationships and getting people to see the bigger picture is essential.

If you can’t get your organization to talk about the project or get key stakeholders involved, you may want to consider punting.   Without that broad support, your strategic payables initiative will be dead in the water.

So, define the initial “size of the prize” and what that means to stakeholders to educate and excite your colleagues.  Align with an executive sponsor to support your initiative.  Then plan an agenda for initial cross-functional team meetings and ultimately execute the agreed upon plans.

It’s a working capital management journey that will reap substantial rewards.  Half the battle is just getting started.  Once everyone is on-board, sustaining a successful program becomes much easier.

What are you waiting for?

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