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ACCENTURE STRATEGY


June 13, 2018
Is your working capital really working?
By: David Axson

Cash is king has long been a mantra for CFOs. The ability to manage cashflows is one of the most basic tenets of financial discipline. Selling things and not getting paid, making things that you cannot sell, and paying for things you can’t afford are all recipes for poor business outcomes and financial ruin.

The ability to effectively manage working capital is a closely watched measure of business and management discipline. Consider that 42 percent of companies we surveyed identified cash and access to capital as a significant barrier to their organic growth goals.1 By improving working capital, businesses can help fund strategic investments, reduce debt obligations or free up cash to return to shareholders.

Simplisitic and rigid practices

For far too long the mantra around working capital management has been pay suppliers as late as you can get away with, collect cash from customers as quickly as you can, and minimize the amount of inventory you have on hand.

Past actions to improve working capital have tended to be indiscriminate of the specific supplier, customer or product situation, but as digital takes hold a more thoughtful approach is possible. Working capital management becomes an ongoing management process not a periodic activity that is undertaken only once a year to meet annual targets.


Case Study

A multi-billion global business services company had close to market-leading Days Sales Outstanding (DSO). However, further analysis found that in addition to their DSO there was close to 30 days of unbilled revenue--more than double their DSO. This was caused by a combination of poorly framed customer contract terms, time consuming internal data collection and excessively complex billing processes. Simply improving internal processes and optimizing customer contract terms yielded $200 million in working capital improvements.


Digitally driven dynamism

Nearly three quarters of companies surveyed by Accenture see digitization, analytics and intelligent automation (DAA) as a top priority.2 The practice of managing working capital is an attractive opportunity for delivering real value through DAA. The ability to: a) record every business event or transaction digitally in real time, b) rapidly identify trends that will impact working capital, and c) develop prescriptive analytics that go beyond identifying the problem and isolate the root cause, allows for significant improvement in key working capital metrics. Three specific use cases are already beginning to realize value:

  • Intelligent collections – profiles and segments customers to enable a different collection strategy for each cluster. Based upon the classification and clustering techniques, predictive analytics can identify customers with a high probability of paying late and identify likely disputes.

  • Real time inventory optimization – monitors the actual level and flow of inventory through the business to fine tune buying, manufacturing and storage decisions. As sensors and other measurement and tracking tools become more widely adopted, machine learning algorithms can prompt replenishment or relocation decisions to ensure the appropriate level of inventory in each market based upon the latest demand signals.

  • Early and late payment analysis – applies machine learning techniques to identify the characteristics of early, late or urgent payments to optimise future payment behaviours.

The use of advanced analytics tools to analyze real-time, transaction-level data allows for rapid, exception-based management of potential working capital leakages. But digital’s value goes beyond that. By understanding the nature of every commercial relationship with buyers and sellers, organizations can develop more flexible terms that reflect the total nature of the relationship rather than just a one-sided view of collecting faster and paying later. In today’s interconnected world, where 77 percent of companies expect more than half their revenue to come from ecosystem partnerships in five years,3 that is not just good business. It’s common sense.

Typical Optimization Opportunity

Metric % Improvement
From Average to Top Quartile
Days Sales Outstanding 40-50%
Days Payable Outstanding 45-55%
Days Inventory Outstanding 50-60&
Source: Accenture Strategy Analysis of S&P CAPIQ data for companies >$1.5bn in revenue

Blockchain as a game changer

Blockchain is going mainstream. Accenture research found that 40 percent of organizations plan to invest in blockchain during 2018.4 In the not too distant future, blockchain-enabled smart contracts will revolutionize inter-company commerce and create huge working capital improvement opportunities. A blockchain-enabled smart contract embeds the terms and conditions of a contract in a distributed ledger allowing every single transaction to be vetted against the contract terms in real time. By ensuring each transaction is valid an organization can improve working capital by eliminating payment timing issues, isolating disputes at the source and allowing valid transactions to be quickly completed in a wholly automated manner.

Efficient management of working capital on a continuous basis is an excellent indicator of the quality of the underlying processes. As companies continue to invest in innovation and respond to disruption, the ability to optimize the use of working capital will be a key enabler of strategy.

RELATED CONTENT


1 Accenture 2018 Strategy Revenue Growth research.
2 Accenture Digital 2017 Supply Chain Analytics research.
3 Accenture Strategy 2018 Ecosystems research.
4 Accenture 2018 Technology Vision research.

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