Treasury Today Country Profiles in association with Citi

Dynamic working capital management: the next frontier for treasury

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Managing the intricacies of working capital is becoming a crucial task for many treasury teams. And a raft of changes driven by technology is giving treasurers the chance to play an even more decisive role in driving value-adding working capital strategies across the organisation.

When companies are under cost pressure, efficient working capital management shoots up the agenda. For many corporations, that is the case today. However, as any treasury team that has embarked on a working capital efficiency project will attest, driving significant and lasting change is no easy feat.

The reasons for this are multi-faceted and will vary slightly from company to company. However, one thing that is consistent across all organisations is that working capital is a truly cross-functional area, requiring treasury to align all disparate departments with different aims and objectives.

Whilst many of the challenges are largely organisational in nature, it is technology and data that hold the answer to solving them. And as we will discover, new solutions are not only enabling treasury teams to better manage working capital – they are also allowing treasury to play an increasingly pivotal role in shaping the future commercial success of the business.

Funding shifting business models

The impact that technology is having more broadly on companies is, in part, driving a renewed focus on working capital. As Michael Vrontamitis, Head of Trade, Europe and Americas at Standard Chartered explains: “The transition to the digital economy is forcing businesses to drastically change their business models. To fund this transformation, organisations are looking to drive out costs and release working capital tied up in the business.”

Achieving this is proving difficult for the world’s top organisations. The Hackett Group’s most recent analysis of the world’s biggest companies’ working capital performance highlights this, indicating that the working capital performance of companies in Asia, Europe and the US is slipping or remaining static (see box for more detailed analysis). Consequently, trillions of dollars remain locked up in working capital around the world.

Across all regions, much of the improvement corporations are making is coming about through changes in the management of days payables outstanding (DPO). “There are numerous strategies that can be employed and they are relatively easy to execute,” says Vrontamitis. “In Europe and the US, the most popular strategies are to push out supplier payment terms and utilise supply chain finance (SCF) solutions. This is also becoming more common in Asia.”

Whilst lots of corporates have realised significant improvements using these solutions, The Hackett Group claim in its latest reports that the use of targeted SCF programmes is only likely to deliver short-term success. Significant and lasting success only comes from a more holistic working capital efficiency strategy that tackles all aspects of the working capital cycle.

Lessons from the best

US-headquartered technology giant HP Inc. is a company that can claim to be world-class when it comes to working capital management. Zac Nesper, Head of Finance and Assistant Treasurer, says this is down to an all-encompassing C-level project the company launched several years ago to become best in class in this space. The project not only involved implementing new solutions but also completely changing the culture of the organisation.

“Historically we were a very P&L focused organisation,” explains Nesper. “This doesn’t necessarily correlate with strong working capital performance, especially when we start talking about changing payment terms of suppliers and customers are involved. Key to our success has therefore been pivoting the focus towards cash flow and ensuring that cash is being considered for in every business decision.”

A natural consequence of this pivot has been the growing presence of treasury in discussions around sales and procurement. “We are involved in frequent and in-depth discussions with our colleagues in both departments to ensure we carefully analyse the impact different strategies have on sales/purchases and cash flow to make sure we do what is best for the business,” says Nesper. “We also work together when communicating out strategies to our suppliers and customers.” The result of all this work speaks for itself and HP has been able to release billions of dollars previously tied up in working capital.

SAP is another company that has worked hard over recent years to improve its working capital efficiency. SAP has transformed the company’s culture and made cash a part of every conversation. “P&L is important, but cash generation is the clearest measure of success for an enterprise in our opinion,” says Todd McElhatton, CFO at SAP North America.

To make sure everyone understands this, SAP has changed how it measures the performance of its staff, giving them KPIs based around first-class working capital management principles. To provide an example, McElhatton explains how the company has turned its sales team into an effective cash collection tool.

“Our sales reps receive their commissions payment for a sale once we have received payment from the customer,” says McElhatton. “Through linking cash collection and commission in this way, our sales reps are now engaged with finance to understand who has and hasn’t paid and chasing up any late payments.”

The use of technology has also empowered SAP to collect more effectively from its customers. McElhatton explains that SAP has recently installed various machine learning and AI powered tools that drive efficiency in its collections process by enabling straight through processes and reducing errors.

These benefits are par for the course of any technology project, says McElhatton. For him, what is most important is the wealth of data on SAP’s customers that this technology produces. “Today, we have a real-time snapshot of our customer’s historical payment performance and every open transaction,” says McElhatton. “This data is invaluable because it means our sales reps can see if their customers have outstanding invoices and find out why these haven’t been paid and ensure we receive payment.”

Transformational technology

The power of data to drive working capital improvement is immense according to Cedric Bru, CEO at Taulia. “The reason for this is simple: data gives you the facts,” he says. “Working capital projects fail because companies don’t have the facts to work with.”

To elaborate on this point, Bru says that while all companies know that they can improve their working capital performance, knowing where and how is the challenge. Technology – and the data this creates – allows companies to better measure their working capital performance and gives them a set of facts to work from. “Once companies have a real-time view on their own working capital performance they can compare this to their peers to see if they are leading or lagging,” says Bru. “Companies can then use this data to work out where they need to improve and how to do this.”

Technology can even tell corporates where and how to improve. On the AP side, for example, Taulia has developed a solution that leverages AI and machine learning to analyse its clients’ data and compare this with other corporates. By doing so Taulia can highlight opportunities for them to offer SCF or amend payment terms with their suppliers, for instance. “This is extremely powerful and means that our clients can easily drive meaningful change that benefits the company,” says Bru.

Most importantly though, the use of technology such as this means that corporates can drive continuous improvement, Bru explains. “Working capital is not a static space and the opportunities that corporates have to improve constantly change. Technology such as machine learning and AI don’t sleep and can show the opportunities that exist to our clients in real time every day of the year.”

On the AR side, Lewis Sun, Managing Director, Head of Product Management Asia Pacific at HSBC is also seeing opportunities for corporates to be more dynamic by using innovative technologies. “By using big data and algorithms, corporates can transform their credit policies from static documents to ‘dynamic’ documents,” he says. “In practice this means that the sales team will be able to offer bespoke deals to their customers like improved payment terms or discounts without increasing the risk or damaging working capital performance.”

In the broader scheme of things, Sun believes the increased use of this technology will ultimately give treasury teams the chance to further highlight their value to the organisation. “The board are interested in the bottom line, and if treasury can provide the tools and support that enable the company to improve the bottom line, this will not go unnoticed.”

More to come…

Working capital is clearly a hot topic and with investment from banks and fintechs pouring into technology to help corporates achieve their working capital objectives there is a lot more to come. And in the view of Victor Penna, Managing Director, Regional Head of Cash Management and Global Head of Treasury Solutions at Standard Chartered, the possibilities are limitless.

“As the world becomes more connected through the rise of eCommerce and the use of internet of things (IoT), corporates are being presented with the chance to completely revisit how they buy and sell and how they interact with suppliers and customers,” say Penna. “As a result, this will completely redefine the working capital metrics.”

Penna provides the example of parts supplied by a manufacturing company. “Traditionally, the company would need to keep a supply of parts so that they could be replaced in equipment when needed – this obviously adds to the DIO of the company,” he says. “However, when you use the IoT and use sensors on the equipment that records their wear, an automated purchase order can then be created when the part need replacing so that parts can be manufactured as they are needed and they arrive at the customer just in time – significantly reducing the days inventory outstanding (DIO).”

This is just a single example, but when you apply this to every other facet of corporate life Penna believes it changes the game completely, linking the physical and financial supply chains more closely than ever before. “In my view, working capital is the new frontier for corporate treasury,” he says. “These developments will give treasurers a multitude of opportunities to have a positive impact on the business, above and beyond the areas they are focusing on today.”

Ahead of the game

Although much of this technology is in a nascent stage, initiatives such as those carried out by HP and SAP demonstrate the working capital benefits that can be achieved today. If that was not enough, Taulia’s Bru offers something else to consider, commenting on the rising interest rate environment in the US (and potentially elsewhere as economic improvement continues).

“Treasurers have been working in a low-interest rate environment for a decade now where it has been cheap to borrow,” he says. “This has made it relatively easy to fund the business cost-effectively using debt. As rates rise, however, the dynamics change: debt becomes expensive and working capital becomes the cheapest form of funding. As a result, those treasury teams that are focusing on working capital today will be in the best position to ensure they can cost-effectively fund the digital transformations of their business.”

Lay of the land

The Hackett Group’s annual survey of working capital performance of the world’s leading corporates provide interesting insight into the current state of play. Here is how corporates in the US, Asia and Europe are currently performing.

US

The working capital performance of the top 1,000 US corporates improved slightly in 2016, with the average cash conversion cycle (CCC) falling from 37.1 days in 2015 to 35.7 days in 2016.

Much of the improvement came in DPO as corporates pushed out payment terms and implemented SCF programmes. Conversely, both DIO and days sales outstanding (DSO) deteriorated in 2016.

Asia

Working capital performance in Asia is on a downward trajectory and the region’s 1,000 largest listed companies had around US$2trn tied up in working capital in 2015 – the latest data available. The average CCC is 45.6 days, the worst seen in the region for more than ten years.

The opportunities to improve working capital performance are abundant. Hackett suggests that better working capital management will unlock US$741bn in inventories, US$633bn in receivables and US$579bn in payables for these companies.

Europe

In 2016, the CCC of Europe’s 1,000 largest companies slipped due to an increase in inventory and receivables. As a result, these companies lost the use of over €1trn, which remained tied up in net working capital.

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