Sustainable Working Capital Improvements: Making Best Practices Stick

When the credit markets suddenly froze during the financial crisis, finance teams at large companies went into triage mode and raised spare-cash levels to unprecedented heights. What's happened since then?

One year ago, APQC's financial management research team began to examine the current and future state of working capital management. Our working hypothesis, which carried across several surveys and published reports, held that the Great Recession was so big and hairy that it would compel CFOs and COOs to pursue sustainable improvements to the management of working capital and cash flow intelligence. The important word in that last sentence is sustainable.

Why Bother?

When previous recessions hit, CFOs and treasurers would routinely assess the extent to which they'd be able to fund daily operations with internally generated cash. To be on the safe side, many would stretch payments to suppliers and pressure customers to pay them faster. Spare cash levels would pop right up. And when the good times started to roll again, they'd take working capital off the worry list. Making sustainable process improvements required a lot of time, money, and political capital. Why bother?

It now looks like our hypothesis was correct. The financial crisis that was precipitated by the collapse of Lehman Brothers in 2008 — the overnight freezing of major credit streams — was the unthinkable that happened. In short order, many executives decided that better control over liquidity risk was worth the bother. They also began to connect the dots between sloppy and slow cash conversion and weak operating discipline. Figure 1 below offers evidence for my claim; it is based on an APQC survey conducted in April 2010 that involved 355 senior finance executives at large North American organizations.

Figure 1.

Do you agree that a sustainable commitment to improve working capital management would offer clear operating benefits?

Sustainable Working Capital Improvements Figure 1

We learned in this Spring 2010 research program that three out of four CFOs and treasurers did not trust their cash flow forecasts. Some had only a loose grip on impending cash commitments. Others were uncertain how much default risk and slow-payment risk lurked in their receivables portfolios. A stark lesson was delivered: Cash is a cushion in times of turmoil, but its value is limited when you don't have reliable information about cash flow drivers or plans to use that cash in economically efficient ways.

Benefits at the operational level

A follow-up research program conducted by APQC in the latter half of 2010 aimed to document true best practices. Specifically, we wanted to understand the strategies, processes, measures, information systems, and closed-loop learning models being deployed to drive working capital discipline and, in turn, operating discipline.

Indeed, the three best-practice organizations that we identified in this study found quantifiable economic benefits from improving working capital processes at the operational level. Obviously related to that, the organizations also found strategic benefits to improving back-end finance processes. That is, by affecting operating discipline, working capital management helped these organizations reach their strategic goals. For all of the best-practice organizations in this study, working capital improvements were driven by customer-centric, overarching strategies.

This study found seven building blocks to successfully measure and manage working capital:

  1. defined metrics
  2. a timely reporting schedule
  3. accountability for results
  4. a cross-functional perspective
  5. frequent summaries for executives
  6. automated systems for reporting and analytics, and
  7. benchmarks for process performance.

In all, the research to date indicates that the desire for better management of working capital will not diminish any time soon.

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