As a prelude to the release of a new AFTE technical report on improving working capital requirements, Nicolas Boulay, associate director at Redbridge and a contributor to the report, shares his views on the key ways to optimize working capital requirements. He explains why it’s a matter of responsibilities, organization, data and people.

– Why is improving working capital a concern for every company?

Nicolas Boulay: Working capital is a central element of a company’s liquidity. In times of abundant credit, managing working capital is not seen as a priority. However, when a crisis occurs, finance departments remember that internal financing is the cheapest and most effective tool to deal with any headwinds.

Optimizing working capital requirements (WCR) also contributes to a company’s long-term profitability. In fact, it enables a firm to free up cash for strategic objectives such as growth, acquisitions, research & development and debt repayments. Paying attention to working capital helps firms to improve the efficiency of their operational processes, reduce costs and better control risks. It can also help improve the perception of the company among its external partners, such as analysts, shareholders, rating agencies, bond investors and banks.


– Who is primarily concerned with improving WCR?

Improving working capital is everyone’s business. In order to mobilize a company’s teams around a cross-functional project, the top managers should support the project. Optimizing working capital sometimes creates tensions between the various functions involved, whose interests sometimes diverge (for example, one team may be concerned about prices paid for a purchase, while another will be more concerned about the payment deadline). The top management team must act as a referee in such circumstances: this is important as it is not always easy to determine responsibilities within complex processes that cut across an organization. The top management team must also ensure that its decisions and objectives are communicated to all operational managers.


How can a firm get its teams more involved in optimizing working capital?

Changing the way that each employee’s variable remuneration is calculated is often a good way. WCR is generally neglected because it is a KPI that is not used or because the issue is poorly explained to employees. Too often, the evaluation of the performance of an organization and its managers is assessed through the operating margin.

To change priorities and behaviors in favor of WCR, the Free Cash Flow indicator must become one of  the performance measures within commercial and industrial companies. Credit policy and purchasing policy should incorporate working capital. Finally, financiers should provide education within the company to help ensure what are sometimes abstract concepts are brought closer to the realities that people experience in their daily work.


– What is the key factor in improving working capital?

It is mainly data collection and control. To successfully manage working capital a firm needs to be able to collect data at very granular levels within its organization. The quality and availability of these data depends on the complexity and efficiency of the underlying business processes, the number of entities involved and the maturity of the information systems used to capture and report the data. To succeed, companies must put two things in place. First, they need to harmonize the definition and interpretation of WCR indicators across operating divisions and information systems. Second, they need to implement a set of processes, roles and rules that will enable information to be used effectively to achieve their cash management objectives. Simple, automated and universally understood indicators provide a clear view of the issues at stake in real time and enable corrective actions to be implemented rapidly.


– Could you provide an example of the kind of things you mean?

I can give several! The first that comes to mind is the adaptation of collection processes to the real-time evolution of customer payment behavior. What should be done when a customer’s credit rating is downgraded? How do you adapt your collection process to the customer’s credit profile?

Second, data analysis makes it possible to identify suppliers that offer the opportunity to negotiate a new contract that is applicable at group level. This is an opportunity to make easy savings and align payment terms and conditions.

Finally, understanding your data enables you to optimize amount of stock by modelling items such as safety stock, minimum purchase quantity and replenishment level. This opens the door to predictive modelling of the supply chain!


– What role can treasurers play in improving working capital?

Organizations are in dire need of people who can cut across structures to free up information, facilitate cooperation between teams and unite everyone around shared objectives. The treasurer can assume this role of facilitator when it comes to working capital.

The treasurer sits at the crossroads of the buying and selling cycles. They are the guarantor of liquidity. They mobilize their tools to determine the need for financing and manage its cost. Their cash flow forecasts already include modelling of WCR cycles and the company’s transactional cycle.

Ultimately, the objective of a better-controlled WCR is to limit recourse to short-term financing options such as bank overdrafts or the mobilization of receivables. The treasurer therefore has a central role in the dissemination of the cash culture due to their position in the company (thanks to the attachment of the credit management function to the treasury department).

Their duty is to raise awareness of the impact of poor cash performance on liquidity management and the associated financial costs. In doing so they need to be able to adapt their speech to each stakeholder.

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