From negative to positive

Dealing with working capital is such an obvious part of business that it sometimes seems surprising it remains of such concern. But business cycles and wider circumstances change, and that means how FDs should handle liquidity (cash, debtors and creditors) will also change.

The Peter Charles approach with every client is to identify the problem and then work out and implement the solution.

Working with one client it was clear from the outset to the Peter Charles consulting interim team that, among a range of other issues, its management of working capital, although functioning well, could be improved. For instance, sales and finance had different objectives, which meant that they did not always share each other's concerns.

What's more, two major changes in the business had fundamentally changed the required approach for working capital management, yet the business had not fully appreciated the implications of those changes. What was obvious from an outside perspective simply hadn't registered internally.

Ironically, the major changes were both good news. First, the business was growing and growth in the sector was a cashflow-negative event in the short and medium term at least (so-called cashless growth). And second, the group had made a major strategic and successful acquisition, but the consequent liquidity pressure meant that the divisions could no longer use the group as a banking facility. In fact, group wanted to see cash coming up from the divisions, not going down.

Once you have identified the key problems, you move on to develop tailored solutions, taking into account any other problems you unearth on the way. The Peter Charles consulting interim achieved this through the 'me see' (mutually exhaustive and completely exhaustive) approach, where fine detail is examined in a useful and efficient way.

Receivables

On accounts receivable it became clear that a small realignment in the sales culture would make a large difference. Once incentives had been reorganised to ensure that the sales team were aware of the importance of good paperwork there was an enormous improvement in account handling and management. As a result it was a lot easier for finance to invoice clients accurately, and issues around invoicing and credit control became much easier to solve to everyone's satisfaction. It also meant that revenue recognition for financial reporting purposes was much easier to prepare and verify.

An update of the business's IT systems helped with a reorganisation of processes and paperwork, and gave much more clarity around sales and therefore collectables. A system that was already working well was made much better for everyone involved, ensuring they could all work constructively and efficiently together.

On receivables from customers, a common short-term solution for improving working capital is to go hell for leather on cash collection. But this route was rejected by this particular business. With the changes that had already been made, cash collection was improving strongly in any case and after a review with Peter Charles the business decided that putting extra resource into credit control would not deliver any material extra return for the level of investment required.

Supplier payments

Traditional working capital management suggests that suppliers should be made to hang on as long as possible before being paid. The downside of this, of course, is that it trashes the relationship. And in this particular business some major suppliers offered worthwhile discounts (the consulting interim team checked, the sums were done) for early settlement. And in any business there are suppliers with whom it is important for the overall good of the business to maintain a constructive, positive relationship.

However, there were actions that could be taken. Again, the current state of the systems was reviewed. The client had carried out an IT upgrade to improve the purchase to payment (P2P) system. And while that upgrade had worked well, the time was right for a further upgrade to bring further efficiency and clarity to the function. This was successfully completed, which meant that the final area for review was the HR side of the finance function.

Staffing

The review found that one accounts payable (AP) clerk was considered the expert on the system and everyone wanted her help and input. Following a review of her working practices, the consulting interim team figured out that she could become even more effective if there was clarity about what she should deal with and what tasks others in the department were perfectly capable of completing. A few simple changes to procedures and responsibilities meant that the department worked well and suppliers were paid properly and accurately within the agreed payment terms of 30 to 60 days.

By understanding the problems, the Peter Charles consulting interim team had been able to find bottom-up solutions that worked, rather than imposing top-down solutions that ignored the reality.

The recognition that there was several elements contributing to the current working capital management required a company-wide response. By changing incentives and relieving pressure, the business was able to achieve significant liquidity improvements that should last over the long term.

The result is a business that has moved from negative cashflow to neutral cashflow, with positive cashflow on the cards in the near future. The systems and processes work better and reporting to group now happens in a format that it wants and can understand. In fact, more liquidity was generated than had been originally targeted and the status of the finance function has been raised within the business. It is now serving as a pathfinder for the global business.

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