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Working Capital Optimisation

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The importance of Working Capital Optimisation and Management 

Whatever the market capitalisation, spikes in share price, value of assets and regardless of sales performance, working capital is the only dependable and consistent mechanism that provides critical insight into the economic shape of a company. Working capital is always one of the first things a savvy investor, venture capitalist and due diligence auditor will look at before investing, merging or IPO’s.

Our formula for optimising your working capital 

Participation

working Capital_CanThis is the first step in the process and without doubt is the most critical. Apart from educating the C-suite, additional education to department heads is also necessary to illustrate to them to which degree they individually influence working capital.

On the flip-side, it is also necessary to point out how improved working capital will positively influence their departments and the company as a whole. This has to be done without playing the performance bonus card. If for example, improved working capital will translate in additional funds for R&D, acquisitions or funding of other initiatives, this has to be clearly pointed out.

Since motivation is a key factor, it’s not uncommon for corporations to embed working capital targets in performance bonuses.

Identifying industry sector working capital drivers

workingcapital_IRPThree prime factors influence working capital. Inventory, receivables and payables. The degree of importance of these three factors will vary according to the industry sector. The impact and proper management of receivables in the FMCG sector for example, where profit margins are razor thin and expiry dates tight, are more important than in the aerospace industry, where payables oversight is more critical as component assembly timing is key and suppliers numerous. 

Identifying industry standard benchmarks.

working capital_industry sectorsThis is the continuation of the above point and should ideally be identified with ratio benchmarks as this method, according to experts, is the most ideal. The reason is simple! Not all operators within an organisation are finance literate. Easily relatable benchmarks offer the most common denominator (or language if you will), whereby all involved can be on the same page.

As a matter of example, software development companies, where collecting receivables quickly is key to funding new R&D projects may identify an ideal benchmark of 60-days DSO (Days-Sales-Outstanding). In the FMCG industry, where the majority of sales is made to key accounts, 60 days may be unrealistic and 90 may be the more achievable norm.

Tracking working capital

working_capital_DashMost companies have rolling cash flow reports. These reports are highly important but are of relatively little help if an organisation is blind as to which factors are driving cash flow results. Case in point, if high overdues is something that is driving cash flow negatively, the high DSO Vs. Sales ratio should be illustrated next to ideal benchmarks and should accompany the cash flow  reports. After all, it’s not everyone that can read and fully understand isolated cash-flow statements.

The right people for the job

Working Capital_Indra Nooyi

No doubt you have heard of these names. Indra Nooyi (Pepsico), Charles Szews (Oshkosh), Marcel Smit (Sara Lee), Ian Reed (Pfizer). But what is it they have in common? They all had backgrounds in Finance before taking the helm of these companies as CEO.

This is in stark contrast to the pre-Enron era where the majority of CEO’s came from Sales or Marketing. Today, in a landscape that has been reformed by post-recession, credit crunch and Sarbannes-Oxley, has put increased pressure on boards to appoint CEO’s that are financially savvy.

In summary, two ingredients are key:

 icon-arrow-circle-right A company head that understands the importance of working capital. 

 icon-arrow-circle-right A CEO appointed project head that shares the same values and is prepared to drive working capital in conjunction with a reputable consultant.

The right consultant for the job

Working Capital_The right consultantOur consultants are top notch!We employ and collaborate with experienced proffessionals from a wide range of financial disciplines,  that had key positions in the corporate world before working with Aidelco. It’s not uncommon for our consultants to have lengthy experience as CFO’s, Finance Directors in industries ranging from FMCG to shipping.

In Summary – Moving Forward

Working Capital_LockAlthough working capital may be a Finance concept, it affects and is affected by all areas of a business operation. When a company makes the prudent decision to apply working capital improvements in their organisations, the whole chain has to not only be educated and understand this concept, but also pull in the same direction with robust internal leadership and reinforcement by a reputable consultant.

Working capital optimisation, improvements and the subsequent monitoring is a pan-company challenge that should be ingrained and institutionalised in the processes, behaviours and the very moral fabric of the organisation.  

Although financing may still be readily available, the lessons learned from the last recession serves in educating us that working capital is the most economical source of incrimental finance that no self respecting organisation can afford to overlook.

If you’re interested in how we can help you optimise your share capital. Follow this link and select ”Working Capital Optimisation”.


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