Part 1 - How does your Cash Conversion Cycle performance compare to the Best? / Part 2 - Is your Working Capital management (WCM) moving beyond a tactical approach?
by Evelyne Legaux on 27-01-2021
Part 1 - How does your Cash Conversion Cycle performance compare to the Best?
One thing that the Covid-19 pandemic crisis achieved in just a few months was to highlight the need for companies to improve their Working Capital & Cash Conversion Cycle (CCC) management.
In particular, both the criticality & complexity of the end-to-end Order to Cash (OTC) process has been brought to the fore and rightly placed in the spotlight!
For much too long, companies have been focusing on their revenue & bottom line performance while downplaying the importance of a healthy balance sheet. Even when Working Capital started to rank higher on the agenda of finance leaders over the past few years prior to the pandemic, the trends observed revealed that companies were mostly “playing” with contractual or actual vendor terms to improve their cash flow as opposed to developing a proper Working Capital management (WCM) strategy.
The Covid-19 crisis has prompted companies to react fast by taking easy-win emergency measures to protect cash & improve cash flow forecasting – however, this will not be sustainable in the long run.
So, why is it that most companies fail to address or keep overlooking Working Capital Management?
Because the cross-functional nature of WCM is challenging & leadership teams fail to support it holistically. This is being amplified by new demands put on people such as social distancing & remote working.
According to a survey recently conducted by Deloitte UK, looking back at the 2008 financial crisis indicates that UK-listed companies saw a dramatic 25% rise in their CCC up to 50 days and took two years to recover down to pre-crisis levels (40 days). Due to a subsequent focus to drive resource consuming process improvements & cash awareness across their respective organizations, those same companies managed to achieve an impressive further reduction in CCC down to 25 days by 2015, meaning less than one month’s revenue was tied up in Working Capital!
Breaking down CCC into its three elements shows informative trends over the past 10 years: while DPO continuously improved, rising by 50%, DIO steadily drifted towards its 2009 post financial crash levels & DSO remained relatively stable over that period of time.
However, such improvement in CCC failed to be sustainable and a return to a 50-day CCC is likely in 2020 as a direct consequence of Covid-19… which has led most companies to understand that having a proper WCM strategy in place supported by an effective governance structure & digital tools using AI has now become crucial to responding faster & surviving not only this crisis but subsequent ones!
Part 2 - Is your Working Capital management (WCM) moving beyond a tactical approach?
Post Covid-19, companies have no option but to re-assess their priorities going forward. At a high level, the following focus areas can already be observed:
It is clear however, that to move further beyond a tactical approach towards mature & sustainable Working Capital management (WCM), companies will need to develop a cross-functional concerted strategy and instil a strong Cash culture throughout their organizations to make it successful.
Additionally, companies will need to address the following challenges:
So, what does it take for companies to address these challenges?
Harnessing digital tools and implementing effective governance systems are now crucial for companies to leverage WCM enablers & drive efficiency gains. This is particularly important looking at the O2C leg of WCM which has so far been largely overlooked by companies. In the present uncertain times, optimizing the complex cross-functional O2C process to minimize risk & maximize efficiency is critical.
Implementing a digital platform to manage the O2C process can benefit companies in different ways: boost revenue, reduce costs, be Cash efficient, improve customer satisfaction & free up valuable resources for analytical & other value-add activities.
With many variants driven by industry, product, geography, transaction type & market segment combinations though, streamlining the end-to-end O2C process proves to be a major challenge and finding a one-size-fits-all technology solution remains impossible today.
Yet, companies now expect to have visibility over real-time data any time throughout the entire O2C cycle, and want their key pain points (outlined below) addressed:
Moreover, in the present highly competitive business environment, giving third-party customers every reason to be satisfied and remain loyal is vital. Hence the increasingly compelling need for companies to implement a fully integrated O2C platform that unites the various functions involved through the entire process.