Whether you're thinking of implementing a working capital optimization strategy because you want to fund an acquisition in the short term, increase share value over the long term or simply free up cash, getting your whole organization on board is an essential and sometimes daunting task. Even the most careful strategy can be rendered ineffective when teams lack accountability or when communication is not orchestrated properly. Below, we've compiled a few steps that may help you implement a game plan and realize your vision.
If you haven't already, establish a firm-wide working capital goal, and make collaboration across your organization an important strategic effort in pursuit of this goal. Get feedback from managers on your current plan, see what the challenges are from their perspectives and capture their ideas about how to best optimize your strategy. Challenges to working capital efficiency (and operational efficiency in general) will likely come from your supply chain management—where REL Consulting, a division of The Hackett Group, notes that “nearly a half trillion dollars ($459 billion) is unnecessarily restricted, due to inferior practices”—as well as from your accounts team around days sales outstanding (DSO) and days payable outstanding (DPO). Set goals and gather recommendations for each of these areas. Every line of business and function should be engaged, should understand the objectives and the impact to the bottom line, and should be held accountable to deliver results against the stated goals.
Now that your team feels like they're a part of the process, fold the best optimization suggestions into your strategy, and assign team managers the responsibility for executing that strategy. Hold these managers accountable for educating their teams about the importance of working capital and the impact it can have on the company; a top-down approach (senior managers to employees) to working capital education can help highlight both the big-picture goals and the smaller nuances of the strategy, and it can help employees recognize how those strategic elements are related to their own roles and responsibilities.
It's important to instill a culture where every person in the company plays a role in improving working capital—whether it's the sales team as they negotiate terms with customers, accounts receivable reps as they resolve a client’s billing issue, or procurement and accounts payable as they respond to suppliers who wish to be paid earlier. It is incumbent that each manager explains the role that every person can play in improving working capital (which means different things for different organizations). This allows employees to make the connection between the tactics of their daily jobs and the impact on the company's working capital, essentially, reframing their approach through the lens of working capital efficiency.
Close any communication gaps that may exist between departments, particularly finance and operations. The job of your operations team should be to take into account the cash impact of decisions that are made, and the job of your finance team should be to communicate to operations managers the financial guidelines they would like operations to follow, including the rationale and financial impact of their decisions on working capital. Both teams should build a rapport so they feel comfortable discussing the working capital impact on situations that emerge, prior to making final decisions or actions.
Information sharing also becomes important as you communicate with your suppliers and customers; if you're going to change the way you manage DSO and DPO, then effective and coordinated communication is key to keeping clients and vendors happy.
For example, if you have a goal to extend your DPO with suppliers, but you also have an initiative to convert suppliers from paper to electronic payments, these two supplier initiatives should be combined to maximize your leverage, as well as minimize supplier disruption.
Conversely, if your goal is to reduce DSO, then you need to establish payment terms policies for sales to follow when negotiating with clients, and communicate to them the value and importance of adhering to these policies. It's important to have open lines of communication and to be as transparent as possible with your functional teams so that they understand the organization’s goals and can buy in to the execution.
It’s one thing to tell your employees that they're accountable when it comes to the success of your working capital strategy—it's another to actually enforce that accountability. One way to do that is to have your managers measure their teams' success. Once you identify what to benchmark, set realistic targets over a fixed time period and then measure results against the stated objective of your strategy.
Also, if you haven’t already aligned manager incentive compensation to the achievement of their working capital goals, consider putting that in place—it's a great way to help them own their responsibility in contributing to an effective working capital strategy.
Lastly, establishing incentives at the individual contributor level—incentives that are specific to the role and impact each individual has—is another best practice, as it's often at this level where working capital leakage can occur.
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