Commentary
What is the appropriate level of working capital? How do we decide when to use supply chain finance tools? Which ones? Who is responsible for working capital in the company? How to obtain the buy-in of business leaders? Are higher interest rates, changes to supply chains and increasing barriers to cross-border trade increasing the pressure on working capital management?
Peers on this call showed a range of pragmatic approaches. Businesses rarely start with a theoretical model of how things should be, and then set targets and structures to achieve this state. Instead, they typically start from where they are, and set targets to move in a specific direction – usually incrementally, but sometimes via a step change. Working capital is no exception: peers’ companies either set targets for improvement in specific metrics, or monitor them to make sure they do not get out of hand. One peer’s CFO has set a target to reduce working capital by 30%, and has given the authority and instructions to pull together the teams needed to make this happen. One peer in the retail segment regularly presents to the board working capital and inventory as a percentage of revenue: any increase is a red flag, and has to be addressed.
One peer has prior experience of working with a sub investment grade company where cash was critical: they performed a deep analysis of the cost of holding inventory against the cost of potential lost sales. However, this remains the exception. The most common approach is to benchmark key metrics such as DSO (Days Sales Outstanding), DPO (Days Payable Outstanding) and DOI (Days of Inventory) against the competition.
There is an organisational challenge. The role of treasury and finance varies considerably: in some cases, finance has direct operational responsibility for procurement or sales operations; in others, the role is purely advisory. Treasury typically has a role in setting targets and monitoring performance. However, success depends on the actions of procurement, sales and the logistics teams – and, for these functions, profit is usually the main driver. Working capital is important, but most businesses are reluctant to forego profit to improve it.
Treasurers respond in a variety of ways:
- Engagement and explaining works better
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