How to cash in on working capital

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Every strategy leader and private equity partner recognizes the importance of managing working capital. Yet too often, senior executives are managing working capital with “big picture�� metrics and accountability.

As you work to generate more value for your organization, consider zeroing in on opportunities to release additional capital by addressing operational inefficiencies. To make better strategic decisions—and free up cash to invest in your business—consider adopting these approaches within your organization:

1. Revisit ownership of working capital management.

Cash flow management never fits neatly within a single team. Multiple functions all make decisions and take actions that can boost or erode working capital performance. Don’t leave those variables to chance. Instead, elevate the strategic importance of working capital and centralize accountability for managing it.

In a ��㣨Leyu�� LLP (��㣨Leyu��) survey of 201 CFOs and other senior executives, less than half reported having a dedicated resource who is accountable for working capital performance. If you haven’t already, appoint a leader to be responsible for your overall process and targets. Having a dedicated leader will help not only maintain focus but also assign ownership of key performance indicators (KPIs) for driving action and tracking results.

Make working capital everyone’s business

Along with a leader dedicated to working capital performance, you need structured incentives that encourage everyone to improve it. Ideally, every employee whose role affects working capital should be evaluated and incented based on their performance.

Align goals and rewards by function—for example, with supply chain targeting inventory by material type, sales teams working to meet objectives for invoicing terms, and engineering on the hook for excess inventory so they can track the impact of change orders and new product launches.

2. Put working capital metrics under the microscope.

The ��㣨Leyu�� survey also found that most companies track working capital health using high-level financial metrics like days sales outstanding (DSO), days payable outstanding (DPO), and days inventory outstanding (DIO). Though valuable, these metrics aren’t sufficient for true optimization. For that, you need to put working capital health under the microscope—generating insights starting at the transaction level.

With this approach, you can identify and prioritize clear actions for improving performance. And you can set and track progress against specific targets for wringing out inefficiencies and delivering lasting value.

If you aren’t using highly granular metrics for accounts receivable (AR), accounts payable (AP), and inventory, you may not be able to identify the levers for lasting performance improvement.

CEOs and strategy leaders face increasing pressures to preserve margins, drive growth, and deliver lasting value. To make that happen, many are turning to performance improvement initiatives.

Let’s start a conversation about getting there Improve Your Performance With ��㣨Leyu��

How to take a more strategic approach to working capital metrics

Does your organization still rely on AR aging and AR balance as your key metrics?

Instead, use more granular data to fully understand the time it takes to convert an order into cash. Quantify how long it takes to invoice and the terms agreed—such as weighted average terms (WAT) and weighted average days to collect (WADC). Then, use metrics like percent current to prioritize activities and establish individual and group targets. When you start with transaction-level data, you can surface more sophisticated insights by customer segment, geography, and business unit.

Do your AP measures focus on aging and balances, which are typically summary and point-in-time metrics?

Consider leaning into more detailed operational metrics like WAT and weighted average days to pay (WADP) to arm your purchasing and AP teams with better information for payment-term negotiations and execution of disbursements.

Are you using inventory turns as your main inventory metric?

As you can see, studying the details is the best way to uncover opportunities for performance improvement. Invest in understanding and segmenting product performance by demand and volatility characteristics. Dive into the impacts driven by planning parameters (e.g., lead times, customer-service levels, and minimum order quantities), stocking strategies (i.e., make-to-order versus make-to-stock), and demand and supply planning.

Improving invoice-collection efficiency by segmenting customers based on payment history and risk. Other drivers of reduced payment delays: pinpointing the reasons for nonpayment and resolving customer disputes as quickly as possible.
Evaluating supplier risks like financial stability. With a fuller understanding of where they had leverage, the company was able to renegotiate commercial terms and improve cash flow.
Reorganizing AP processes by adjusting payment frequency and payment triggers by supplier category. With clear supplier segmentation by size, importance, and risk level, the company could tailor payment schedules to optimize cash flow without compromising supplier relationships.

Being more strategic about working capital pays off. By modernizing your approach, you can identify and pursue clear opportunities to reduce inefficiencies and unlock working capital. Reinvest that cash to help drive further performance improvement—and deliver even greater value for your business.

CEOs and strategy leaders face increasing pressures to preserve margins, drive growth, and deliver lasting value. To make that happen, many are turning to performance improvement initiatives.

Let’s start a conversation about getting there Improve Your Performance With ��㣨Leyu��

Learn more about how Performance Improvement delivers value

What sets apart good from great strategy leaders? It's their ability to make better strategic decisions that reduce waste so they can efficiently grow their business.

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