Financial Supply Chain

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Uncovering Cash Through Dynamic Working Capital Management Companies can release valuable liquidity and sustainably enhance business processes by using new dynamic and automated analysis tools for working capital modelling which were not previously widely available.

Uncovering Cash Through Dynamic Working Capital Management

by Sven Lindemann, CEO, Hanse Orga

Efficient 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?

One answer can be found, among others, in the source of the data that is usually reverted to in order to measure the typical working capital KPI including Days Sales Outstanding (DSO), Days Payable Outstanding (DPO) and Days Inventory Outstanding (DIO): in most cases, these are derived from the annual financial report or quarterly or monthly financial balance sheet and P&L figures. While a monthly analysis is already much better than an annual analysis, the limitations of even monthly reports become clear instantly: the analysis can only deliver a snapshot of the processes at a certain reference date. It doesn’t tell you, however, what your metrics and your cash position were like a few days or even just one day before or after that particular date. In essence, this approach lacks dynamic reporting!

And what’s more: somebody has to actively, in many cases manually extract the data and analyse it, which is why some companies are reluctant to measure their working capital KPI altogether.

According to the experience of Hanse Orga, which offers tools and consultancy for working capital management, companies that keep a firm hold on the processes affecting their working capital are usually much better prepared for when the next crisis hits and can get through turbulent times without major difficulties. Additionally, companies with efficient working capital management are in a better position to streamline their internal processes so that they profit from much greater efficiency. Moreover, they also achieve optimal levels of liquidity and they become more independent from external funding.

Higher levels of working capital management processes provide transparency of data for management decision-making, ensuring the short-, medium- and long-term liquidity needs of the business are met in the most cost effective way. Instead of maintaining high bank account balances as protection against an unexpected cash shortfall, working capital is better used to further the strategic development of the company. You just need to know exactly how much cash you need and how to enhance your processes to ensure that you maintain optimal levels of cash at all times. Through exact cash forecasting companies will know how much cash they will need, in what currency, when and for what purpose. Consequently, defining the optimal level of working capital they need to fund the daily operations of their business securely is vital. Working capital management matters to every company regardless of size or industry sector.

So what is it that companies seek to achieve when they embark on the project of optimising their working capital management? Their aims usually are:

  • to ensure sufficient liquidity at all times for their business
  • to increase profitability of their company
  • to release value cash for investments or for reducing external funding
  • to enhance processes

But how can organisations best accomplish these aims and reach optimal levels of working capital management?

Real-time data and continuity are key to success

What is really needed to get your working capital working for you is a broad, sound and dynamic analysis of your processes. So if you start a working capital management project for the first time or if you want to improve the one you already have, make sure to overcome the limitations of traditional working capital analysis which is static and historically focuses on DSO, DPO and DIO.

To be able to reap the benefits and uncover the trapped cash, it is essential to identify the cost-drivers in accounts receivable and payable. For this, you will need to look beyond the key metrics of DSO and DPO and analyse the details of your financial processes in a holistic way. That includes amongst others:

  • Billing and settlement processes
  • Payment conditions in purchase and sales
  • Revenue management and dunning process
  • Control and steering of outgoing payments

To obtain the data to properly evaluate these processes, you would normally have to manually go through a lot of paper work including, in particular, your invoices and transaction data. Modern technologies, however, like the new analysis tool Hanse Orga has developed, can lift the processes to an entirely new level: collating the above-mentioned parameters is done automatically by drawing all the necessary information from your documents and transaction data. In that way, companies can achieve a truly dynamic analysis of their processes relevant to an efficient working capital management model. Instead of comparing static data on certain reference dates, such tools can give you in real time all the data you need to enhance your processes.

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