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As companies look to fund renewed growth, they need to take a longer term view of how they manage their working capital.
Developing such an approach will not only help them to finance growth but will also yield more substantial benefits—and may make them better able to weather future downturns. Accenture outlines the issues and identifies six guiding principles.
During the economic crisis, many companies switched to short-term working capital management tactics such as delaying supplier payments, aggressively enforcing collection terms and squeezing replenishment of inventories to build up the cash reserves they needed to keep trading.
Many of these actions are not sustainable.
Now that the immediate crisis has passed, companies are looking beyond survival to improve working capital to fund investment and return to growth. Managers should now consider sustainable improvements in the underlying inventory management, accounts receivable and accounts payable processes that drive working capital. Such changes require a different level of focus, a more comprehensive approach and a willingness to make a more substantial investment in processes, technology and people initiatives.
Taking a more strategic approach to working capital management can help generate benefits beyond greater liquidity and reduced debt burdens. It may also provide flexibility for growth, investment and increasing shareholder wealth through dividends. Indeed, if more companies had managed working capital effectively and consistently throughout the past decade, they could have been more prepared for the downturn.
An Accenture survey of 1,405 senior executives at large organizations in North America and Europe underscores this point: less than one-third of the respondents cited inventory reduction and payables/receivables optimization as levers applied for reducing costs during the previous year.
Layoffs, job eliminations, organization restructuring, and employee compensation and benefit reductions were all cited more frequently—even though they have a disruptive effect on the organization and employee morale. Moreover, 56 percent of respondents said cost- reduction efforts had no impact on cash flow or actually hindered it.1
Developing a more effective approach to working capital will require integrating it into operational processes. Organizations will also need to consider changes to business processes and IT systems. While there may be some tradeoffs, improvements made to improve the management of working capital can help improve other aspects of day-to-day operations.
1 Accenture Cost Management, An Aspect of Profit & Cash Optimization Study, 2010
Distilling Accenture’s research and experience, we have identified six important principles guiding companies that excel in working capital management.
Reset expectations through strong governance. All organizational levels need to be involved, with strong and sustained leadership from the top.
Identify the highest-impact problems and scale appropriately. Many organizations pursue an overly broad program without first understanding the richest areas of opportunity.
Choose the right performance measures. Successful businesses set working capital targets at a company, department, team and even individual level, where appropriate.
Adjust incentives. Bonuses, commissions and other forms of compensation should be aligned to achieving working capital goals.
Take a segmented approach to implementation. Define meaningful customer and supplier segments and map out a plan for each to mitigate resistance.
Evaluate and reengineer business processes. Changing inventory management, payables and receivables policies must be followed by changes to operational systems and processes for maximum benefits.
September 21, 2011
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