6 TMI | SPECIAL REPORT WORKING CAPITAL OPTIMISATION 2015 E fficient working capital management is generally known to be key to releasing valuable liquidity and to making the best use of a company’s own resources. In fact, with the right approach, CFOs can release significant levels of liquidity depending on their individual situation and on their industry sector. Working capital management is a hot topic that keeps going up and down on the corporate agenda worldwide. During times of crisis, significantly more companies are concerned with getting more out of their internal resources and focus on efficient working capital management. In times when cash is readily and cheaply available on financial markets, working capital often drops to the bottom of the corporate agenda. So, what keeps companies from taking greater control of their valuable internal resources? Uncovering Cash Through Dynamic Working Capital Management by Sven Lindemann, CEO, Hanse Orga Working capital management is a hot topic that keeps going up and down on the corporate agenda worldwide.
Transcript
6 TMI | SPECIAL REPORT
WORKING CAPITAL OPTIMISATION 2015
E fficient working capital management is generally known to bekey to releasing valuable liquidity and to making the best useof a company’s own resources. In fact, with the right
approach, CFOs can release significant levels of liquidity dependingon their individual situation and on their industry sector. Workingcapital management is a hot topic that keeps going up and down onthe corporate agenda worldwide. During times of crisis, significantlymore companies are concerned with getting more out of theirinternal resources and focus on efficient working capitalmanagement. In times when cash is readily and cheaply available onfinancial markets, working capital often drops to the bottom of thecorporate agenda. So, what keeps companies from taking greatercontrol of their valuable internal resources?
Uncovering Cash ThroughDynamic Working CapitalManagementby Sven Lindemann, CEO, Hanse Orga
Working capital managementis a hot topic that keeps goingup and down on the corporateagenda worldwide.
One answer can be found, among others, inthe source of the data that is usuallyreverted to in order to measure the typicalworking capital KPI including Days SalesOutstanding (DSO), Days PayableOutstanding (DPO) and Days InventoryOutstanding (DIO): in most cases, these arederived from the annual financial report orquarterly or monthly financial balance sheetand P&L figures. While a monthly analysis isalready much better than an annual analysis,the limitations of even monthly reportsbecome clear instantly: the analysis can onlydeliver a snapshot of the processes at acertain reference date. It doesn’t tell you,however, what your metrics and your cashposition were like a few days or even justone day before or after that particular date.In essence, this approach lacks dynamicreporting! And what’s more: somebody has to
actively, in many cases manually extract thedata and analyse it, which is why somecompanies are reluctant to measure theirworking capital KPI altogether. According to the experience of Hanse
Orga, which offers tools and consultancy forworking capital management, companiesthat keep a firm hold on the processesaffecting their working capital are usuallymuch better prepared for when the nextcrisis hits and can get through turbulenttimes without major difficulties.Additionally, companies with efficientworking capital management are in a betterposition to streamline their internalprocesses so that they profit from muchgreater efficiency. Moreover, they alsoachieve optimal levels of liquidity and theybecome more independent from externalfunding. Higher levels of working capital
management processes provide transparencyof data for management decision-making,ensuring the short-, medium- and long-termliquidity needs of the business are met in themost cost effective way. Instead ofmaintaining high bank account balances asprotection against an unexpected cashshortfall, working capital is better used tofurther the strategic development of thecompany. You just need to know exactlyhow much cash you need and how toenhance your processes to ensure that youmaintain optimal levels of cash at all times.Through exact cash forecasting companies
will know how much cash they will need, inwhat currency, when and for what purpose.Consequently, defining the optimal level ofworking capital they need to fund the dailyoperations of their business securely is vital.Working capital management matters toevery company regardless of size or industrysector. So what is it that companies seek to
achieve when they embark on the project ofoptimising their working capitalmanagement? Their aims usually are:
� to ensure sufficient liquidity at all timesfor their business
� to increase profitability of their company � to release value cash for investments orfor reducing external funding
� to enhance processes
But how can organisations best accomplishthese aims and reach optimal levels ofworking capital management?
Real-time data and continuity arekey to success What is really needed to get your workingcapital working for you is a broad, soundand dynamic analysis of your processes. So ifyou start a working capital managementproject for the first time or if you want toimprove the one you already have, make sureto overcome the limitations of traditionalworking capital analysis which is static andhistorically focuses on DSO, DPO and DIO. To be able to reap the benefits and
uncover the trapped cash, it is essential toidentify the cost-drivers in accountsreceivable and payable. For this, you willneed to look beyond the key metrics of DSOand DPO and analyse the details of yourfinancial processes in a holistic way. Thatincludes amongst others:
� Billing and settlement processes � Payment conditions in purchase and sales � Revenue management and dunningprocess
� Control and steering of outgoingpayments
To obtain the data to properly evaluate theseprocesses, you would normally have tomanually go through a lot of paper workincluding, in particular, your invoices andtransaction data. Modern technologies,however, like the new analysis tool HanseOrga has developed, can lift the processes toan entirely new level: collating the above-mentioned parameters is done automaticallyby drawing all the necessary informationfrom your documents and transaction data.In that way, companies can achieve a trulydynamic analysis of their processes relevantto an efficient working capital managementmodel. Instead of comparing static data oncertain reference dates, such tools can giveyou in real time all the data you need toenhance your processes. For optimising inventories a lot more
work is necessary, as more departments areinvolved in buying, selling, managing andaccounting for them. By focusing on the
What is really needed to get your workingcapital working for you is a broad, sound anddynamic analysis of your processes.
accounts receivable and payable processeshowever, companies can already uncoversignificant amounts of cash. Measures thatwill help reduce working capital levels giveyou better control over your cash and createpositive effects for your balance of accountsincluding the acceleration of collectionprocesses and better control over thepayments processes.
Accelerate collection processes There are a number of options to speed upthe collections process in order to ensurefaster and more reliable incoming paymentssuch as shorter payment terms, earlypayment discounts and reducing the time ittakes between delivery and billing. You alsoneed to know the payment behaviour ofyour customers to ensure that you have theright approach for your individual customerand consequently achieve better paymentmorale across the breadth of your customerbase. Getting your customers to pay on time is
a key step towards optimising your workingcapital. To take the right measures for thatyou need to know which of your customersusually pay on time and which do not; byhow many days the payment typically comesin late and whether a customer always payslate or only sometimes. The latter isparticularly important as you do not want torisk confrontations with your valuedcustomer who usually pays on time.You need to know whether the payment
terms you grant are too generous or whether
there is the opportunity to shorten themwithout offending customers. Throughshortening the terms you can start chasingany bad debts earlier and ensure better cashposition for your company. Offering early payment discounts can help
improve cash collections. But at what cost?At the current times of low interest rateseverywhere, an early payment discountallowing one or two per cent off the invoiceamount is very favourable for customers. Forthe vendor, that may mean that he is gettingthe cash in very early, because his customers
are likely to take advantage of the excellentconditions. For the vendor however, an earlypayment discount always means a loss ofprofit. This can be seen in figure 1 whichshows the case of customer no. 62625 whois one of the fastest to pay his bills, but whois at the same time the one that causes thegreatest expense through high cost for thesupplier in areas unrelated to a specificinvoice. It is therefore advisable to evaluateexactly how the costs of the discount areoffset against the cash that comes in earlyand whether he can afford to offer suchdiscounts. This is what specialisedtechnology can deliver with a mouse-click.Beyond the consideration of the pricecomponents, modern business intelligencetools can automatically calculate the effectson balances and on profit & loss accounts.
Optimise outgoing paymentprocessesThere are also a number of areas in thepayments processes that can be enhanced.For example, the number of payment runsper week or per month can reveal interestpotential, if the working capital analysisshows that outgoing payments arefrequently made too early. Due to such earlypayments, a company loses out on interestopportunities. The same goes for early
Fig 1 – Consideration of other price components is necessary
Offering early payment discounts can helpimprove cash collections. But at what cost?
payment discounts. If companies do notmake use of such discounts they give awayopportunities for saving money, moneywhich they could use for investment returns.Particularly in times when interest rates arelow on the market such early paymentdiscounts present significant savingsopportunities. Another area which is easily overlooked
when it comes to optimising working capitalis the identification of the due date. It is notunusual that the due date is calculatedbased on invoice date. It is common howeverthat due date calculation only begins fromthe day the goods are delivered or theinvoice is actually received. By identifyingsuch discrepancies and adapting the internalprocesses accordingly, companies canfurther optimise their working capital level.
New methods and tools foranalysing working capital One of the greatest advantages of using newworking capital analysis methods is that forthe first time, companies will be able toobtain comprehensive real-time data and toachieve dynamic analyses and enhancemanagement decision-making. Such a broaddata set empowers companies to evaluatetheir working capital metrics over time andtrack any improvements through changes inprocesses. Moreover, they will be able tocompare metrics for their corporate entities,for individual customers, for sectors andother criteria which can be flexibly selected
depending on the individual corporatesituation. In summary, these are the mostvaluable benefits of the new methods andtools:
� Dynamic working capital management� Based on comprehensive real-time data(transaction data and documents)
� Continuous analysis� Flexible selection of criteria for individualreporting
� Comprehensive reporting – fromaggregate to highly granular level
� Immediate identification of processinefficiencies
� Ability to react quickly and improveprocesses instantly
Value of the new approach
Companies can release valuable liquidity andsustainably enhance business processes byusing new dynamic, comprehensive analysistools for working capital modelling which hadnot been possible before. Manual efforts thatused to be involved in such analyses areeliminated, and automated analyses are nowavailable to companies by a mouse-click. Thisnew approach is optimal for companies whodo not see working capital management as aone-off project, but who are instead seekingto foster continuity in their working capitalmanagement to shed light on the hiddenpotential within historic and incompleteworking capital management methods. �
Sven LindemannCEO, Hanse Orga
Sven Lindemann is responsible for Consulting and StrategyDevelopment on the executive board of Hanse Orga, andspearheads the internationalisation of the company. Aftertraining as a software developer at the Vereins-und Westbankhe first joined Hanse Orga as a software consultant. A fewyears later he joined the management board. Since 2001 hehas been on the executive board of Hanse Orga and in 2012took over the chairmanship of the board from his father andfounder of the company, Hans Herbert Lindemann.
Companies can release valuable liquidity andsustainably enhance business processes byusing new dynamic, comprehensive analysistools for working capital modelling.
