The pressure’s on to add to your bottom line and reduce levels of debt. Yet, many companies continue to overlook opportunities in the most obvious places.
The evidence of this became clear after we reviewed last year’s annual working capital performance of the consumer products industry and discovered approximately US$35 billion was unnecessarily tied up in the top 21 CP companies across Europe and the US. This is equivalent to 6% of their sales!
Companies that excel in working capital management will not only be in a position to generate more cash from their businesses, but will be less dependent on external financing and have more flexibility to take advantage of opportunities as they arise. If you have not reviewed the effectiveness and sustainability of cost reduction and supply chain efficiency initiatives within your organization, you may be leaving cash on the table.
Use these 10 steps to help create an effective working capital management strategy:
1. Create appropriate incentives for management to improve cash performance. 2. Effectively manage payment terms for customers and suppliers (with terms and conditions appropriate to the current environment).
3. Improve speed and accuracy of billing and cash collections and deal with disputes effectively.
4. Use data captured for disputes to eradicate the root cause.
5. Monitor rebates, discounts and other sales incentives.
6. Develop an agile supply chain that can respond better and faster to changing market conditions.
7. Build stronger links and closer collaboration between the various participants of the working capital value chain internally and externally, focus these around sharing of demand signals and planned response down the chain.
8. Maintain metrics that monitor customers’ and suppliers’ financial health.
9. Identify the key drivers of working capital consumption and focusing on improving them (forecast error, lead-times, minimum lot sizes, supply variability, capacity constraints, speed and accuracy of billing, customer segmentation and appropriate collection strategies).
10. Identify, understand and quantify the trade-offs that need to be made (e.g., order fill rates or inventory levels, early payment discounts or longer payments for payables optimization, larger batch sizes or inventory levels).
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