Too often, working capital optimization depends on traditional linear approaches that fail to take into account a holistic look at the company’s entire cash picture. But that’s exactly what’s needed today, argues Dan Ginsberg, managing director at SGS Maine Pointe, a Boston-based supply chain and operations consulting firm.
Ginsberg spoke with StrategicCFO360 about a “triple impact approach,” the role of automation and positioning your company for the post-Covid future.
How can a company take a more balanced approach to optimizing working capital?
Basic working capital optimization often lacks a holistic view, often taking a reactionary stance that focuses on a single area such as inventory-only or receivables-only, with a short-term view. A more effective approach to optimizing working capital would be comprehensive across inventories, receivables and payables—all areas where cash may be tied up—and also to ensure synchronous gains in reducing costs and improving service.
This concept of reducing the working capital tied up in your business while simultaneously balancing improvements in cost reductions and service levels—what I call the Triple Impact—helps organizations dramatically improve cash flows from operations, break down inefficiencies between departmental silos, achieve greater visibility into both cash and cost performance, and ensure necessary alignment across sales, inventory, purchasing and ultimately, customer service levels.
Inventory issues have moved to the forefront, especially during Covid. How do these inventory issues impact cash flow, and how can management optimize inventory to overcome these issues?
The current working capital crisis many companies are seeing may be seen beginning in the area of inventory. Over the past few years, unexpected inventory issues arose due to Covid-driven issues like shifting trends in sales, shipping issues and overseas suppliers unable to deliver as usual.
Shifting sales trends may have resulted in excess inventory, which resulted in cash being tied up in warehoused and unsold goods. Supplier issues may have resulted in a shortage of goods and service quality issues, particularly as customers may find some goods no longer available or carrying unexpected price increases. All of these factors have a negative impact on cash flow.
Even in an environment where new sales trends, shipping issues and shortages of goods and parts cause inventory problems, cash flow can be better managed. The first step will be to align sales with inventory, so that management has a better picture of what needs to be fulfilled at any given time. This practice, often rooted in automation and analytics, will eliminate the mismatch that often occurs between sales and inventory, thereby avoiding many of these issues.
Sales and inventory operations planning will help better align sales, production, manufacturing, assembly and logistics, and ultimately, free up cash that would otherwise be tied up in unsold or unnecessary inventory—while also improving service to the customer.
How does a cash flow optimization strategy balance changes in inventory, payables and receivables?
The inventory issues and solutions described earlier should be balanced with optimization of both payables and receivables in order to achieve a complete cash flow optimization strategy. Combining all three of these levers will help the organization meet their strategic cash flow optimization goals of having the cash available to improve service, increase shareholder value and fund projects as needed.
On the receivables side, optimization may focus on reducing disputes and monitoring the dispute cycle, again with automation and digitalization tactics with triggers that issue alerts when human intervention is required. Optimizing customer terms with appropriate discounts may also prove useful in speeding up the payment cycle, and further improvements to cash flow may be achieved with standardizing best practices within billing, credit and collections.
The third lever of payables, often seen as a traditional driver of cash, can also help the cash flow scenario by taking advantage of, and negotiating for, price discounts and payment terms, a strategy that often yields quick results.
What role does automation and analytics play in cash flow optimization?
Automation is relevant in all areas related to cash flow optimization, from analysis to execution and across inventory, receivables, payables and beyond. It’s important to keep in mind though, that automation does not mean “set it and forget it”—it’s far too integral to the survival and growth of the business.
What it does mean is that it can be used strategically to accelerate many of the tactical decisions that must be made in a distribution center for inventories. Similarly, automation can be applied to areas like collections or dispute management in receivables. Most importantly, automation goes a long way toward reducing costs, improving accuracy of repetitive tasks and minimizing error rates across the board.
An automation toolset may also prove useful to overcome staff shortages, by incorporating tools like barcode scanning, robotics and decision-making in many areas.
Why is cash flow optimization particularly critical now?
Optimizing working capital is more important now than ever, especially as we move out of Covid-driven inventory shortages, shifting B2B and B2C spending patterns and supply chain disruptions all across every industry. Of course, higher financing costs and fewer available sources of financing necessitate stronger and more sophisticated liquidity and cash management practices throughout the entire organization.
Interest rates have effectively taken the topic of working capital out of the CFO’s office and put it on the priority list companywide. As a result, companies must now execute much stronger cash flow management practices to take measurable impact, balancing cash, cost and service across all areas. Within that strategy, companies will see a most effective strategy in activating three levers—optimization of payables, receivables and inventory, and the recognition that all three are interrelated.
Lastly, optimization will become essential to all companies, whether they face immediate risk or not. It has become more evident than ever over the disruptions of the last few years that the unexpected will eventually happen—and companies which may not have risk on their radar will nonetheless face it at some time in the future. It is better to be prepared for the unexpected.
Companies with a sophisticated cash culture will be able to better withstand future periods of slow growth and unexpected challenges like the ones we’ve seen over the past few years, while also maintaining better visibility and control over their cash flow picture.
