It is an unfortunate fact that very few companies who have run successful working capital programmes have sustained the gains they realised from the programme. Looking at the world’s top 3000 companies less than 10 have made continuous improvements in all three areas of working capital over a 20-year period. But for those who have been successful and sustained that success for even a short time the strategic benefits have been massive. One of the best examples today is ABInbev who have been masters at working capital for many years and this has allowed them to grow into an industry superpower. So it is always fascinating to understand what the successful companies have done to sustain working capital success.
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Creating a Cash Culture
The creation of a cash culture is essential for long term success. Working capital is often poorly understood outside the finance community and it is essential that the entire organisation is educated to understand the impact of their actions on working capital. This then makes sales people think before extending customer terms, make the procurement people think before accepting a discount or price decrease in exchange for shorter terms and will make the manufacturing people think before producing items for stock that go unsold for months at a time.
Measurement is another key element. There is an old adage that you cannot manage those things that you do not measure and working capital is the same. At one organisation where they had extended payment terms to a standard of 60 days the percentage of supplier spend on that term slipped from nearly 90% to 43% over a 10-year period. This was a big shock at the time but it meant that the right measurements were put in place and still exist today.
Changes in Personnel
It can also be difficult when there are changes in personnel. If that cash culture does not exist we may have new people who join the organisation who do not understand the importance of working capital and who will start to unravel all the elements that sustained working capital success.
Then there are events such drastic changes in prices, currency rates, supply chain disasters that cause a business to go into emergency mode. If this happens there is a real risk that working capital will sacrificed simply because no-one was paying attention while the event or its effects were being resolved.
Mergers and Acquisitions
One of the biggest destroyers of working capital are mergers and acquisitions. Mergers and acquisitions are almost always focused on EBITDA and not working capital. The 90-day plan is introduced to slim down the organisation and reorganise the parts that are left into a shape the aligns with the strategic goals of the new organisation. In the process a lot of talent and experience will walk out the door, there will be an intense level of disruption to the everyday business and working capital results will take a back seat.
All successful change must be led from the top and sustained from the top. Working capital benefits are no exception. Every part of the organisation must understand their impact on working capital. If this is not the case, then at some point when the focus of the organisation changes the benefits will drift away.
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