71% of Companies Rank Working Capital Optimisation as 'High Priority'

Have you notice there’s a lot of noise around the ‘sexy’ topic of working capital optimisation? Maybe there is more of a loud chatter in the US, and only a soft murmur in Europe. There seems to have been a surge in working capital information in the US recently, but dare I say Shared Services Directors and Finance Directors are simply gathering information, and ‘taking a peek’ rather than actually instigating working capital optimisation (WCO) projects?

This being said, a recent research brief compiled by the Aberdeen Group, states that seventy-one percent of companies have identified WCO as ‘high priority’. Is this a surprise? There is such pressure on companies to reduce the cost, time and effort to process transactions (purchase invoices and sales invoices), that surely we’re all doing this to reap the epic monetary rewards that come from intelligent management cash flow? Surely we are all moving our purchase to pay process from non PO and paper to PO and electronic so it qualifies as a massive contributor to our hugely impressive working capital management machine?

Personally I am not so sure. Ask the pioneers of shared services about WCO, and although they have the slickest finance operation, WCO rarely seems to have been the driver. On the flip side, talk to a company like Cable & Wireless, who stopped the leakage of £1 million a day through cleaning up their P2P and O2C operations, but their electronic processing penetration is virtually non existent.

So when experts in the industry say, if you want to reap the benefits of WCO, then you have to start with scrutinising the quality of your financial operations, then you have to ask yourself how essential this is? Yes, a clean and timely P2P process will aid WCO, but does it really have to be electronic?

Of course there are other drivers for e-invoicing, like increased control over liabilities, huge cost reduction and a much better process, but how many of us would actually say the main driver is WCO? In Europe I would imagine relatively few. In the US, it maybe more.

Aberdeen refer to the significant benefits that come from WCO which include:

Four day advantage in DPO compared to average companies
19 day advantage in days inventory outstanding versus average companies
6.5 times as likely as peers to have decreased end-to-end financing costs in the supply chain in the past year
5 percentage points higher return on working capital versus average companies

Their conclusion was that the best-in-class companies achieving these impressive numbers bulleted above had, on the whole, automated their supply chain finance. So, to conclude, maybe it helps to have a toned and touchless P2P process to help you gather the sweet fruits of WCO, but how much WCO in itself is driving the shift in process change we are seeing in finance, is very open to debate.

See Cable & Wireless’s story on Working Capital Optimisation in this newsletter. Jennifer Pinney presented this case study in London in June 2008. In December she will be talking about maximising the investment in SAP at ‘Toning Up Purchase to Pay to Attain Touchless Processing’ in Paris on the 10th and 11th December 2008.