When a major global crisis strikes, most businesses go into survival mode. Suddenly, overnight, cash becomes king once more — as perhaps it should have been all along. Effective working capital management is highly technical and not exactly glamorous, but it’s the fastest way to free up cash without going on a cost-cutting rampage, or vastly increasing sales overnight.
The COVID-19 pandemic is no exception, and has shown that even during seismic disruption, there are significant gains to be had by freeing up working capital. Hackett’s recent Accounts Receivable CFO report suggests that organizations have as much as $1.3 trillion tied up in excess working capital — with a potential $379 billion and $390 billion to be had from optimizing Accounts Payable (A/P) and Accounts Receivable (A/R) respectively.
It’s clear that most businesses aren’t operating at their full capacity — missing out on invaluable cash that can make the difference between just-about-managing and driving growth in the face of disruption.
So unless you’re in the small minority of businesses whose cash flow has been untouched by the impact of COVID-19, 2021 needs to be the year you refocus on working capital.
Fortunately, as a CFO, you’re in the perfect position to improve working capital across your organization. Here are four changes you can make to help boost cash reserves and help your company navigate the choppy waters of COVID recovery.
A/R and A/P processes have a huge impact on your organization’s working capital. According to the State of Business Execution Benchmarks Report 2021, organizations could free up hundreds of millions of dollars in working capital just by optimizing Days Payable Outstanding and Days Sales Outstanding.
A/P in particular is often the quickest and easiest way to free up cash. It’s a lever you have nearly complete control over, so it makes sense to use it during challenging times.
Early payments, for instance, are entirely in your control. Your suppliers might thank you, but your working capital certainly won’t. Whether it’s due to bad prioritization, mistimed payment runs or inaccurate payment terms, early payments should be easily avoidable.
A/R is slightly trickier to manage. But just because your customers control when you get paid, there are still opportunities to be had.
Seemingly simple mistakes such as the wrong details on an invoice, sending the wrong goods, and even sending the invoice to the wrong entity can affect your suppliers’ ability to pay you on time. These issues are all avoidable and easy to rectify with a little bit of foresight, and crucially, can free up significant working capital.
From data entry and pricing errors, to using the wrong payment terms, there are thousands of ways that transaction errors can negatively impact your working capital.
But without going through each invoice to check for accuracy, and cross-referencing it against your list of suppliers and terms, it’s almost impossible to see where your inefficiencies lie.
This is where process mining comes in.
By using your data to offer objective insights, process mining can give you far greater operational oversight over your existing business processes — helping you analyze where your inefficiencies lie and offering optimization solutions.
And when process mining is combined with machine-learning and automation, it can help deliver the right changes in exactly the right places, offering major returns on investment.
Once payment terms are negotiated and agreed, making alterations to them can be almost impossible. So it’s critical they’re done right the first time.
According to Hackett, a company should have no more than 20 different payment terms with its suppliers. Beyond this, supplier payments become difficult to control.
You also need to consider how your organization’s sales department goes about agreeing terms. The truth is, payment terms have limited impact on your organization’s sales department figures, and are an attractive negotiating tool for sales teams under pressure to meet targets.
For example, if a 90-day payment term has been agreed for a particular customer, but your standard is 30 days, that’s a significant amount of cash locked up for the best part of two months each time.
On the flip side, supplier terms of more than 60 days can provide significant working capital benefits — so maintaining what you’ve worked hard to negotiate can be critical.
That’s why it’s important to ensure that everyone who has control over agreeing payment terms understands the impact they can have on working capital.
A common thread running through companies with optimized working capital processes is their Procurement teams have clear guidance about their impact on cash flows.
That’s because Procurement is generally the first point of contact for any supplier, and is therefore responsible for negotiating terms. From supplier evaluation, to the initial definition of contracts and terms, decisions made by Procurement can have a significant lasting impact on working capital. And of course, Procurement can make sure the right terms are being leveraged when POs actually go out, saving A/P a number of issues further downstream.
That’s why it can be useful to look beyond A/P and A/R — particularly if Procurement comes under your remit — to help address working capital issues at their source.
Each of those four levers for optimizing working capital is relatively straightforward — in theory at least. But, to execute any of them successfully, you need deep, reliable insight into your finance and supply chain processes, clearly showing you what’s going wrong today, and where the opportunities for improvement lie.
For many CFOs, process mining is the missing piece they need to easily identify, analyze, and address inefficiencies across A/P, A/R, and Procurement processes — helping them consistently unlock and optimize working capital.
To find out how Celonis can help you unlock working capital and maximize execution, check out our Execution Applications.