GAMECHANGER’S GUIDE TO Working Capital Optimization
GAMECHANGER’S GUIDE TOworking capitaloptimization1
Contents1. The Gamechanger’s guide toworking capital optimization. 42. Goal setting: the Gamechanger’sapproach to working capital optimization. 83. Building a game-changing team:leadership and collaboration for workingcapital optimization. 164. How the right partner can help. 205. The working capital optimizationdashboard. 246. Game-changing deployment. 307. Bear traps. 348. The Gamechanger’s work is never done:refine and repeat. 40
Here’s to theGamechangersWe’ve produced this guide to help youtransform your company.That’s a big claim, but we’re confidentit’s justified.In the 1950s, the average lifespanof a company listed on the S&P 500was almost 60 years. Today it’s under20, and companies everywhere arequickly realizing they must changeto remain relevant and competitive.Transformation doesn’t happen byaccident. Transformation happenswhen individuals have a vision andtake action.We call these individualsGamechangers.It’s easy to spot Gamechangers in CEOroles. Steve Jobs at Apple and Jeff Bezos atAmazon redefined their industries throughorganizations they created.For everyone else, it may seem theopportunities for changing the gameare more limited. Yet a key enabler oftransformation in the modern corporation iscash; cash to power research; cash to fundacquisitions; cash to enter new markets.Too often, too much cash is locked up in yoursupply chain due to inefficient processes,assets, or other resources. The Gamechangeris the one who sees how to liberate that cash;making it available for growth opportunitiesthrough the transformative power oftechnology. If you’re reading this, there is astrong likelihood that the Gamechanger inyour organisation is you.At Taulia, we’ve made a business out ofempowering Gamechangers.We constantly monitor and analyze paymenttrends across our database of more than 1.5million suppliers transacting billions in annualspend. We put these insights to work byenabling cash flow optimization strategies forour customers.For the Gamechanger, that’s great news.But every Gamechanger needs to startsomewhere, and this guide will help youput in place an innovative working capitaloptimization program so your company canbe enabled to transform and grow.Welcome to the future.Cedric BruChief executive officer, Taulia3
1.TheGamechanger’sguide toworking capitaloptimizationThere is as much as 14tr in annual spendvolume trapped in global supply chains,which could be released through workingcapital optimization programs, and currentlyonly 800bn is being addressed throughtoday’s solutions.That’s a huge opportunity to free up cash toinvest in the transformation needed to preparefor an ultra-competitive digital reality. In fact,Ernst & Young reports that for every US 1bnin revenue, the opportunity for working capitalimprovement averages US 70m.Research conducted by The SCF Communityfurther estimates finance costs across thesupply chain could account for up to 37% ofthe retail price of common products (chartabove). If smaller suppliers are paying higherrates for the finance they need, that’s going to
18%CAR37%T-SHIRT31%LAPTOP27%SUGARSOURCE: SUPPLY CHAIN FINANCE COMMUNITY/WINDESHEIM UNIVERSITY RESEARCHbe reflected in what they have to charge you.Reducing these costs for suppliers could lowerthe cost of goods sold and deliver a significantcorporate competitive advantage.A traditional, incremental approach won’tbe up to the challenge of liberating thenecessary sums to finance the future. Instead,you’ll need a game-changing approach –one that understands that it is supply chainsthat compete, not companies, and thereforerecognizes that a cash flow optimizationstrategy must look across the whole of thesupply chain, optimizing cash and workingcapital throughout.As Nick Boaro from Ernst & Young points out(see box), cash is becoming a market-sensitivetopic and therefore a CFO – and CEO –priority. Yet a successful strategy for optimizing5
that cash needs to bring on board everymember of the organization, from purchasingto finance to sales and everyone in between –and every member of the supply chain, too.Over the rest of this guide, we’ll take a stepby-step approach to designing and deliveringa program that does just that.From scoping your project, through gainingsupport, right through to delivery, this guide isyour roadmap to success.
GAMECHANGER NICK BOARO:WHY CASH IS KINGThere has always been a drive for cash, but inthe current economic cycle we see two types oforganization.The first are looking for alternative strategies otherthan financing because they are tapped out but needto generate additional cash flow. Some of thesemay be early stage start-ups, others late-stage butdistressed.The other type are industry leaders who are doingwell but have always focused on the P&L and neverput much discipline around the balance sheet.They’ve driven a lot of value out of everything else, sofor them the balance sheet and cash flow is the nextarea to focus on.For public companies, we’re seeing a lot moreinterest from the investor community in cash flow as abarometer for how efficient the business is. And we’reseeing CFOs actually committing cash flow guidanceto the market. So it’s not just about ways to improvethe balance sheet, but also about making sure theycan predict where it’s going to land.Nick Boaro // EY7
2.Goal setting: theGamechanger’sapproach toworking capitaloptimization
Let’s be clear: the game-changingopportunity isn’t short-term, tacticalworking capital improvement, but longterm optimized cash flow, which continuallyimproves over time. This will create anefficient enterprise cash culture whichreaches beyond your business and to that ofyour supply chain, benefitting all businesseswell into the future.Many current working capital optimizationprograms start with tactical, rather thanstrategic, objectives take for example bankled programs that look only at the top100 suppliers. These programs ignore theopportunity that lies across the full lengthof the supply chain. The Gamechangeracknowledges this limitation. So what shouldyou do differently?9
Let’s think in terms of thestrategic changes we want.Here are five to start with:Gain true visibilityof the cash positionacross the companyand the supply chain.Develop strong,digital invoiceoperational processesthat are intrinsicallylinked to an efficientcash flow optimizationculture.Don’t forgetyour suppliers –considering their buyin and early adoptionas part of programsuccess is imperative.Enable flexible ‘levers’that can be pushed/pulled to improveworking capital,capture early paymentdiscounts.Break down silos: establish a cross-departmentalcommittee focused on common cash goals andconsisting of representatives from Treasury, Finance,Procurement, IT, and Executive sponsorship.Sound good? Of course, there may be others, perhaps specificto your business sector or location, but with these five you’rewell on the way to a Gamechanging working capital strategy.Let’s drill down into the detail of these changes and how wemight work towards them.
1Gain true visibility of your cash position acrossthe company and the supply chainThe financial health of a modern, connected, companydepends on the financial health of its supply chain. Surprisingly,most businesses have very little understanding of the financialhealth of their suppliers and so the burden of risk, includingsupply chain risk and customer fulfilment risk fall to the buyingbusiness.The right digital tools can allow the Gamechanger to see boththe buyer’s and supplier’s working capital position across DSO,DPO and DIO – the full cash conversion cycle. An intelligent,data-driven system can go further by benchmarking a buyingorganization’s spend against a live database of actual paymentbehaviors. This ‘window’ into supplier health indicators givesthe Gamechanger the insight needed to optimize their owncompany’s financial goals, but also to drive enhanced supplychain health.2Enable flexible levers that can improve workingcapital, capture more early payment discounts,reduce supply chain finance costs and improvesupply chain healthWhat is most important for your business? Working capitaloptimization and cash generation? Better returns on excesscash? Margin improvement? De-risking the supply chain?Improving supplier relationships? What if it’s all of these things?The Gamechanger should look for a solution partner who canhelp you achieve many, if not all of these objectives, as wellas keeping an eye towards your future growth aspirations (butlet’s save that for Chapter 4).11
3Develop strong, digital payablesprocesses linked to an efficientcash flow optimization cultureTake a close look at your payables process –from a supplier’s perspective as well as yourown – and you may not like what you see.Even the best Gamechanger will struggleto deliver results if AP can’t deliver timely,accurate invoice approvals or execute timelypayments, for example.Don’t blame AP: traditionally it’s been lookedat as a cost center and so it’s often last in thequeue for investment. The Gamechangerrecognizes that it’s a core component in howcompanies optimize their cash flows becauseit dictates when early payment can be madeavailable and, more importantly, is a criticalsource of data to feed into a data-drivenprogram.A digital platform can help drive inefficiencyand errors out of this process, but you’ll alsoneed to embed best practices in the minds ofeveryone in the business, as well as providingthe technology to support them.4Break down silos: establish across-departmental approachspanning Treasury, Finance,Procurement and ITTreasury wants to deploy cash for maximumimpact at low risk, while Procurement aimsto reduce purchasing costs. Finance wantsprocess simplicity while IT wants smoothintegration with other systems. It wouldbe easy to leave one of these groupsdissatisfied: the Gamechanger brings thesegroups together to collaborate in a crossdiscipline team and align their goals with the
corporate strategic objectives. Decision-making is data-driven,using information that can help evaluate the full scale of theopportunity, as well as the trade-offs facing the organization.The result will be common goals for working capital, costreduction and supply chain health, that every team canunderstand. You can learn more about building a collaborativeteam in chapter 3.5Supplier strategy: including your suppliersas you build your objectives and strive tomeet theirsToo often working capital programs are buyer centric. Ifthey do consider the supplier it’s almost as an afterthoughtin seeking not to disadvantage them too much. TheGamechanger takes a different approach. They understandthat it’s supply chains that compete rather than individualcompanies and to be truly successful a cash flow optimizationstrategy encompasses all suppliers as well as the buyer.The Gamechanger will seek from the outset to develop acash flow strategy that encompasses supplier goals such asDSO reduction, lowering financial borrowing costs, ensuringpayment certainty and providing better receivables visibilityand control. Just like internal departments it also includesworking with suppliers to develop programs from the outset.13
GAMECHANGER GRAEMEREYNOLDS ON THE VALUECHAINThe value chain goes from our suppliers to Vodafoneto our customers. That value chain is there to bedivided up – but the more value that flows to thepeople who are financing the value chain, theless there is for everybody else. So if you can takefinancing costs out of the value chain – regardless ofwhere the banks are taking their money – this meansthere’s more value left for our customers, our suppliersand ourselves.The pricing of our scheme is based on Vodafone’scredit risk, so if you set the interest rate caps lowenough, then suppliers will use the SCF scheme. IfVodafone is more expensive, then they won’t. So thepricing caps are a tool for making sure that we’reshifting the funding cost onto the part of the valuechain where it can most cheaply and easily be funded.Any supplier can sign up for our scheme – so even ifyou’re desperate for cash and in a bad situation, youcan still get access to funding.Graeme Reynolds // Vodafone Procurement
A HOLISTIC APPROACHAs you are setting your working capital goals, make sureyou avoid the company-centric approach. It’s vital to makeallowances for the financial position of the players in thesupply chain itself. If your key suppliers are struggling toaccess finance at acceptable rates, that’s going to meanhigher prices for you or, perhaps worse, a higher risk that akey supplier will fail for lack of cash and throw your supplychain into chaos. Factor in the cost of capital for suppliersand the extent and timing of their cash needs – lower costsfor them can mean lower costs and reduced risk for you.That’s why a game-changing approach considers not onlythe goals of the organization but the financial health of thesupply chain. By understanding where cash is tied up inthe supply chain, what suppliers’ cost of capital is, wherecash can be released and which tools can best be used tounlock it, the Gamechanger can measure the full extent ofthe working capital optimization opportunity available to thesupply chain and negotiate how best to share those benefits.So what are the potential benefits? They differ for everyorganization, but some candidates to consider are:»» Working capital cash freed up»» Reduction in finance costs throughout the supply chain»» Margin improvements or returns on cash generated bydynamic discounting»» Supplier satisfaction metrics»» Reduction in supply chain risk.Whichever benefits you choose have to be aligned withthe wider goals of your organization. In a game-changingprogram, the strategy and goals drive the tools and themetrics – not the other way around. You can find more onmetrics in Chapter 5.15
3.Building a gamechanging team:leadership andcollaboration forworking capitaloptimization
Because our starting point is your corporation’s goals, not only those of treasury orprocurement, the Gamechanger will ensure that C-level executives, in particular, the CFO,are on board from the start. Only they can commit the necessary resources to conduct thepreliminary research, and their backing will be essential to persuading others in the business tosupport the working capital optimization program.So who are the key players you need to bring into your Gamechanging team?TREASURY This is where cashis measured most, so youmight think it’s the naturalhome of working capitaloptimization. Some treasurers,however, still look at optionssuch as supplier finance asadding cost and complexityto the process of movingcash and may need help tounderstand the wider benefitsfor the organization. Here’sanother thing about treasury;in the past, it’s been seen asa back-office function whichdoesn’t get out much. But ifyou’re going to recalibratethe enterprise cash culture,treasury is going to needto strengthen ties with theother teams. We know ofcorporations which havephysically relocated treasuryto sit alongside procurement,for example. Even if that’s notpractical for your organization,do the next best thing – getthem together, buy them acoffee and get them talking.PROCUREMENT A secure,healthy and motivatedsupply chain is what thisteam values most, and theyare likely to react badly toanything which threatens that.Procurement own supplierrelationships and with thatcomes the responsibility tonegotiate terms includingthe introduction of any earlypayment program. Modernworking capital optimizationprograms, however, can takerisk out of the supply chainand create a win-win for bothsides of the buyer/supplierpartnership. So much so,that it’s often procurementwhich leads the charge on thesupplier finance of a cash flowoptimization program. Eitherway, you need procurementto be part of the conversationfrom the very beginning andwithout their knowledge ofsuppliers the program will bedifficult to scale.FINANCE From the CFOdown, finance needs tounderstand the benefits ofworking capital optimization.The CFO is a key sponsorand supporter – without theirbacking, you’ll find it difficultto overcome any internalresistance to your plans.ACCOUNTING Theaccounting treatment of anyworking capital optimizationprogram can be a minefieldfor the unwary. You’ll needto work with this team, andwith legal, if you are toavoid having your payablesreclassified as debt, forexample (see section 6).LEGAL As with accounting, alegal opinion on your programis essential, especially when itcomes to complex contractualarrangements with suppliersand finance providers.17
SHARED SERVICES Thepeople at the ‘sharp end’are the ones who areactually processing thosepayments. If your cashflow optimization programmakes their lives harder,why would they cooperate?Engage with them and helpthem understand why yourprogram is important tothe company – and workwith them to make sure anychanges to processes gosmoothly.IT Your beautifully designedworking capital optimizationprogram will rapidly runinto the sand if these guysaren’t on board at an earlystage. Don’t try asking themto integrate your digitalplatform into your company’sERP if they haven’t beeninvolved in the planningprocess from the start.SALES Often the last area tobe considered, but perfectlycapable of derailing a workingcapital optimization strategyif ignored. Many sales teamsare incentivized on the valueof contracts signed in a givenperiod, but not based on thepayment terms. If that’s thecase, then offering longerpayment terms can seem likea painless sweetener. Paymentterms need to be built intoany incentive scheme if yourcompany is serious aboutoptimizing cash.
BUT WHO’S RUNNING THE SHOW?Collaboration is great, but every project needs a championwho will drive it forward and push for progress. That’s you– the Gamechanger. But as cash flow optimization stopsbeing a project and becomes embedded in the companyculture – as it must – that role changes. We’ve seen manycorporations do something radical to make sure the focus oncash doesn’t fade with time. These companies are creatingnew roles with the responsibility to ensure cash stays at thetop of the corporate agenda. Call it Head of Working Capitalor Chief Cash Officer, this new role is becoming a marker forcompanies who care about cash.19
4.How theright partnercan help
You’ve established your goals, won buy-infrom the CFO and built your cross-functionalteam. Now it’s time to look outside thebusiness. Partner organizations such as afintech platform provider, finance provider orworking capital consultant can play a vital rolein helping the organization measure the scaleof the cash flow optimization opportunity.These four key questions should help selectthe right partner:»» Are the partner’s goals aligned with theorganization’s goals? The partner’s roleis strategically important: they should notbe regarded as a mere provider but as atrue collaborator. They should be ‘a goodfit’ with the organization and in particularwith the corporate function that is takingthe lead on the program (see Building thegame-changing team). In their dealingswith the organizations’ suppliers, theirculture should be to treat them as thoughthey were their own clients. Their efforts tomake the onboarding process as simple andpainless as possible should be unstinting.21
»» Is the technology offer right? Richfunctionality should deliver added value,such as extra insights, reporting and makinga range of choices available to users.Scalability and flexibility are important sothat the platform can provide tools such asreverse factoring and dynamic discounting– d
Gamechanger takes a different approach. They understand that it’s supply chains that compete rather than individual companies and to be truly successful a cash flow optimization strategy encompasses all suppliers as well as the buyer. The Gamechanger will seek from the outset to develop a cash flow strategy that encompasses supplier goals such as
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