Holistic working capital management in times of crisis
The current period presents companies with largely unprecedented challenges.
Political measures to contain the spread of Covid-19 have resulted in serious operational disruptions that have affected almost all sectors and continue to this day in some areas.
Many companies are facing quarantines for their workforce, disruptions in the value chain, inventory shortages and a sudden collapse in demand.
These new business conditions are increasing the pressure on existing liquidity, particularly because sales slumps will increasingly be permanent in nature rather than merely temporary.
This situation presents companies with the task of proactively approaching suppliers, customers and lenders in order to identify short-term solutions to support cash flow and leverage hidden potential.
Working capital management plays a decisive role here as a component.
This becomes all the more evident and at the same time more problematic in these turbulent times with uncertain markets and the accompanying increase in the turnover period of current assets and often associated longer receivables terms.
Through optimized and coordinated processes in purchasing, inventory management, sales and receivables and payables management, companies can establish and implement measures as part of integrated working capital management that can ensure a sustainably improved return on capital while simultaneously improving the liquidity position.
Current potential problem areas for companies
Simultaneous collapse in demand and restrictions on value chains are putting pressure on cash positions and working capital.
- Suppliers are unable to deliver critical components, leading to delays in the production process
- A downturn in customer demand increases inventories and makes them increasingly difficult to sell
- Receivables are more difficult to collect promptly due to customers in financial difficulties
- Short-term restrictions affecting cash flow lead to difficulties in paying suppliers
Against this backdrop, the importance of effective and optimized working capital management is more apparent than ever.
In recent years, this measure was still low on the list of priorities for some companies, but due to the difficult combination of inevitably high inventories, high levels of receivables and expensive liabilities, it is now becoming an acute urgency with the need to act.
Holistic working capital management as a solution
Holistic working capital is the method of choice here because it recognizes the prevailing exceptional situation and goes beyond a purely business management approach to sustainably link management and optimization to three essential basic processes in the company: order-to-cash, purchase-to-pay and forecast-to-fulfill (see Fig. 1).
These three components make it clear that the drivers of working capital performance are operational rather than financial.
For example, debt collection issues could be due to a number of reasons other than poor staff performance.
For example, a supplier could be supplying the company with faulty products, which has an impact on the quality of the end products and can lead to customers withholding payments.
Or the shipping department may not meet deadlines, resulting in customers receiving deliveries late.
The aim of holistic and integrated working capital management is to include all of the main processes described along the value chain in the approach and thus to identify and holistically optimize cross-functional relationships and dependencies.
Specific guidelines for successful working capital management
One prerequisite for robust cash management is a disciplined cash flow forecast.
This includes:
- Daily monitoring of cash holdings
- The implementation of a strict cash flow forecasting process lasting several weeks in conjunction with adequate tools
- The optimization of internal cash transactions
- The implementation of a cash-centered culture in the company, moving away from P&L metrics
The following are a few levers for concrete application in times of Covid-19, but taking into account the holistic approach to working capital management described at the beginning.
The aim here is to take pressure off working capital and counter liquidity bottlenecks by freeing up cash.
1. claims
- Invoices should be obtained as soon as possible
- Consideration should be given to granting cash discounts under the conditions of shortened payment terms with more favorable conditions for the customer
- Payment terms with customers should be re-examined and deadlines reduced to the absolute minimum from a sales strategy perspective
- Cash collection from customers with high outstanding receivables should be monitored on a prioritized basis
- Proactive contact with customers to minimize the risk of disputes and late payments
- Constant monitoring of existing disputes with customers and addressing the origin of the disputes
- Installation of EDI processes for automated invoicing and dispatch processes as well as for dunning processes
2. inventories
- Minimizing order quantities and batch sizes and increasing order and production frequency
- Re-evaluation of minimum stock levels and associated parameters
- Evaluation of opportunities through consignment stock
- Examination of restrictions in the production process to avoid bottleneck effects and reduce WIP
- Installation of fully integrated merchandise management systems
- Examining opportunities through the outsourcing of pre-production
- Getting rid of “slow sellers” and obsolete stock through discount campaigns
3. liabilities
- Review of existing supplier contracts and their payment terms
- Re-evaluation of the supplier portfolio
- Implementation of guidelines to avoid early payments
- Prioritization of payments to business-critical suppliers
- Individualized contracts with key suppliers
Conclusion
In times of Covid-19, good working capital management requires more than ever a holistic view of cross-functional value creation processes in the company in order to effectively counteract working capital burdens and eliminate liquidity bottlenecks, especially in the short term. What is important here is a stringent and revolving planning and controlling process that ranges from conceptual orientation to strategic and operational control and is characterized by its cross-functional and integrated nature.
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