Businesses are learning that a multifaceted strategy to the management of working capital is the optimal way to unlock value – and a multi-stakeholder approach is the best way to achieve that.

These were the two key themes to emerge from the latest gathering of the Working Capital Forum, held at the Dorchester hotel in February. The event, sponsored by C2FO, was hosted by Mike Hewitt, managing director of Adaugeo Media and director of the Working Capital Forum. Conducted under the Chatham House Rule, it attracted participants who had backgrounds in treasury, P2P and procurement from a wide range of industries.

One participant, from a business that has gone through a significant turnaround in its financial health explained that his organisation used to “burn cash year on year: treasury’s role was about raising new cash and convincing investors that it was a good bet”.
Now, however, the business is generating cash and so the investor relations message is about “convincing them that we have better places to put that that cash than they do. Otherwise they will want cash to be returned to shareholders.” With available yields being so low, the business is looking to generate value from its supply chain.

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As a result, the company is now improving its former reputation as a bad payer – and avoiding late-payment penalties – as well as taking benefit from suppliers by paying somewhat earlier. But rather than a ‘one size fits all suppliers’ approach, the company is prioritising vendors “where we know there are working capital issues within their organisation and where there is best advantage for us when we pay early”.

The right KPIs?

Another participant agreed with the general view that working capital key performance indicators (KPIs) were, indeed, becoming embedded within organisations – “but are they the right KPIs?” he said. “We often see them getting in the way of sensible decision-making. What’s the ultimate goal of the company? Is it to have cash on its balance sheet or is it to make a profit?”

The problem arises, he said, where cash is deployed through dynamic discounting to secure a profit margin improvement but at the same time running contrary to working capital KPIs. “So how do you do something that’s sensible for the corporate? That tends to put treasury and procurement at odds over their different goal sets,” he said.

Andrew Burns, director, business development at C2FO (pictured left at the Forum), picked up on this and added that businesses are increasingly moving beyond seeing working capital management as a binary issue – fixing either a balance sheet problem or a P&L problem: there is also risk to be considered. “There is a lot more fluidity in optimising the supply chain,” Burns said. “You have to look at the value that people are looking for out of the supply chain.”

He explained that businesses may have a short-term interest in the balance sheet to meet financial reporting expectations, but in between reporting periods the goal could be to look for P&L improvements as well as to de-risk the supply chain by getting finance into it. “So there are three factors that can adapt according to what the business demands are.”

It also means that businesses can generate cash from one part of their supply chain through extension of payment terms and implementation of reverse factoring tools, then using that cash to secure P&L benefits from other parts of the supply chain – all the while de-risking the supplier base.

Furthermore, marketplace models of dynamic discounting now make it possible to secure value out of the supply chain that suppliers are prepared to offer. “If you push through early payment savings of 5%, then if, say, 25% of your supply base would have been happy with 9%, you’ve just lost 4% value,” Burns explained. “That’s where getting the most value unlocked through the marketplace model is really effective.”

The collaboration challenge

One of the biggest hurdles to achieve a well-implemented strategic approach, however, is the difficulties in breaking down silos and getting treasury and procurement – as well as finance, accounts payable and IT – to speak to each other and work together. “Procurement and treasury don’t really play well together in large organisations,” observed one participant. “That’s something that needs to be addressed. The better procurement and treasury can work together the more value can be secured.”

One participant who has a finance background commented: “Treasury is viewed as managing the big ticket stuff and then finance or AP does the small ticket stuff and the two initiatives don’t always gel together. I’ve done a lot of work in optimising procure-to-pay systems: if you can get procurement to own it all and have treasury being helpful to procurement, then I think it becomes more effective. It certainly inflates procurement’s idea of their own importance – which I think is a good thing.”

“We’ve moved to a more collaborate approach, recognising that working capital is an asset that can give us a benefit in the market place so we are collaborating across functions,” said another.

“This whole area requires collaboration internally and with the wider organisation – ie, including the supply chain,” said Burns. “It’s not a ‘them and us’ nature anymore, which it’s tended to be in the past.”