Fixing the Working Capital Machine: Start 2015 the Right Way

As was explained in a previous article, working capital management is a hot topic. We urged caution and a long-term strategic approach; stressing that to be effective, working capital management initiatives need clear scope, leadership, and an explicit mission with documented targets. Without these elements, organisations are likely to start with good intentions and a flurry of uncoordinated activity – which quickly fizzles out as people realise the true scope of the task ahead.

That advice still holds true. Working capital management is about many iterative improvements to dozens of processes and activities distributed across the organisation. While there will no doubt be opportunity for ‘quick wins’, long-term sustainable results will need long-term sustained efforts. Any chief executive or chief financial officer who is looking for easy answers to ‘fix’ working capital management should have their expectations quickly recalibrated.

Virtual and Physical Treasury Centralisation

The centralisation of finance processes is gathering momentum. It affects physical treasury units and shared services centres (SSCs), as well as the virtual – through consolidation of IT platforms and the introduction of global cash pools and web-enabled data sharing. This trend provides a real opportunity for working capital management to be executed properly.

Every Organisation Follows its Own Path

However as was also said in the earlier article, every organisation is different – and by no means do all treasurers sit in a strategic, centralised role at the helm of an already effective working capital machine. In many businesses, working capital performance and treasury optimisation have been neglected while other avenues to growth and increased profitability have been pursued. For treasurers in these organisations, the journey ahead looks very different.

In light of this, we’ve developed a maturity continuum that highlights some of the qualities and capabilities of world-class organisations, as per Figure 1 below. It’s important to note that this is not a checklist for your business. Not all organisations follow the same path, in the same order, at the same rate and they certainly don’t have the same endpoint in mind.

Figure 1: Maturity Continuum for Working Capital Management

Nordea working capital management graph

Source: Nordea

The Path to Visibility and Control

The important thing to note is the general trend. In pursuit of working capital performance, organisations must look for greater visibility and control, and that means faster access to data, across organisational, country, bank and currency siloes. It means automation of pro-cesses. It means centralisation of decision-making. In addition, it means system integration to put information where it’s needed in the business.

Exploring the Changes

Most organisations will start with decentralised processes, systems and framework, where management occurs at a local level. Forecasting liquidity needs and performing even relatively basic financial processes is a slow, manual and error-prone process, and strategic management is inhibited by lack of control and visibility. This has a real impact on working capital efficiency.

As treasury looks to mature, its strategies may become more ambitious. For instance, if the treasurer starts looking at cash pooling at a local level, he/she might move to cash pooling across borders and currencies – thereby gaining insights into the true cash status and available credit facilities across the group.

Centralisation of treasury is by no means the only catalyst for working capital management improvements, but it is nonetheless an important theme: it’s impossible to lead global improvements without it. Initially this will be management centralisation, giving treasury the visibility needed to make effective forecasts. Yet it also includes centralisation of more operational finance activities such as payments and collection through a shared services model and ultimately a full in-house bank (IHB) model.

Technology plays an increasingly important part. Instead of manual processes, more mature treasury functions move toward automation, digitisation and integration of finance systems with other business systems such as enterprise resource planning (ERP) and with bank systems, enabling rapid payments and a “single view of the truth”, as well as optimised pro-cess operating costs and reduced error and risk. Ultimately, with a truly end-to-end holistic view of business and financial operations, the group treasury has an accurate forecast of liquidity needs and instant control over working capital.


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