This blog first appeared on the Corcentric website.
According to The Hackett Group, effective cash management could free up an average of $0.78 billion per company.
Myopia is a dangerous thing when it comes to business. Shortsightedness can lead companies to make cash flow decisions that offer quick fixes but create long-term problems. Slower payment schedules and “just enough, but no more” inventory may work temporarily, but what’s being left on the table is mind-boggling. According to The Hackett Group, when it comes to effective cash management, “The performance gap between the top 25% and the bottom 75% is significant: under-performing companies could free $776 billion – or an average of $0.78 billion per company – by matching the top performers in their respective industries.”
As The Hackett Group notes, what is needed is continuous process improvement and an agreement to essentially eliminate silos and create a holistic working environment. These moves have been intensifying over the past decade. Collaboration between departments and functions is increasing, most significantly in the procurement and financial process areas. The procure-to-pay and order-to-cash workflow and process cycles have benefited from this collaboration; they’ve also been made possible by the growth and advances in process automation solutions and access to real-time data, 24/7.
So how are companies actually doing when it comes to working capital management? A CFO.com article, “Achieving Working Capital Maturity,” published earlier this year discusses the results of the REL 2015 Working Capital Survey of the top 1,000 companies in North America and Europe. REL, a division of The Hackett Group, found that “only 1% of companies have achieved improvements in the cash conversion cycle [days of sales outstanding plus days of inventory standing minus days of payables outstanding].a key measure of working capital performance, for the last 3 years in succession.”
The article stated that there are four levels of this working capital maturity: Lagging, Achieving, Exceeding, and Leading. Each level lists five to seven characteristics that they possess, and how those characteristics change as the company moves along the working capital maturity continuum. Those lagging still have silos; in those that are achieving, there’s informal cross-functional movement. For those that are exceeding, high levels of cooperation and cross-functional operations exist; and, for those in the leading level, functional cooperation is “prevalent.”
In addition to cross-functional collaboration, what also determines the level of working capital management includes: establishing working capital metrics and KPIs, developing standard terms and policies that are communicated to all appropriate personnel; full visibility into all outstanding assets and liabilities; ongoing training in working capital management; and a C-suite commitment to success.
Optimizing working capital management was once viewed as almost exclusively a Fortune 500 capability as they could best afford the time, money, and effort to create the tools needed to succeed in this effort. However, with the proliferation of SaaS-based financial process automation tools, small and medium-sized businesses (SMBs) have access to solutions that will enable them to realize the benefits of working capital management optimization as well.
Implementing financial process automation in both the accounts payable and accounts receivable functions will not only give management the tools needed to measure performance; it will also streamline once manual processes, leading to greater efficiencies and reduced costs. And with the full visibility these solutions provide, C-suite executives will have all the data they need to make more strategic business decisions based on an accurate accounting of their working capital.
See how SaaS-based solutions can help you better manage your working capital.