Working Capital Analytics: The Power of Proactive Cash Optimization

Many successful companies watch their working capital closely – and with good reason. It is one of the best indicators of a company’s financial well-being and its cheapest source of finance. Among the three most important business elements of cash flow, growth and profitability, many business leaders consider cash flow as the true barometer of business performance. Recent economic developments have compelled companies to look into releasing cash locked in operations for their working capital. This calls for sustainable initiatives in inventory management, accounts receivable and accounts payable processes to reduce working capital and improve return on capital employed.

Working capital analytics can increase liquidity and profitability by reducing the debt and cost of capital. The challenge lies in overcoming the lack of:

• Access to real-time information to evaluate working capital processes

• Cross-functional view for a unified understanding

• Skilled analytical resources to meaningfully focus on optimizing working capital

With the right expertise, analytics can draw action-based insights in collection effectiveness, slow pay, percentage adherence to payment terms, qualitative overdue analysis and past due ratios. Similarly, inventory analytics can uncover critical upstream issues in demand forecasting and inefficient logistics. It can also solve problems that are not confined to inventory issues.

By breaking down cash, growth and profitability using the overall customer and strategic supplier performance dashboards, companies can get detailed visibility into leading and lagging key metrics across the working capital cycle. This will, in turn, enable more effective control and management.

Let us now look at the role analytics can play in the area of risk management.

Risk Analytics: Moving Intelligence from Reporting to Discovery

The new dimensions of analytics go beyond business intelligence to build measurement parameters that evaluate potential risk scenarios. Companies can use these parameters to plan and establish an integrated data baseline to measure risks across the organization.

As an example, many leading organizations adopt a trigger-based action approach. They identify output metrics and their input and in-process counterparts, and then decide acceptable floor and ceiling levels for these metrics. This is pretty much like stock-trading charts. As these metrics cross a certain threshold, a well-documented series of actions is triggered. The resultant impact is more favorable than it would have been if a small trend outlier, missed due to lack of monitoring, were to come back to haunt the management teams after evolving into a full-fledged problem.

Today, risk analytics is more likely to capture the outlier situation as a possibility for preventive action through the elements of data exploration, segmentation, statistical clustering, predictive modeling, event simulation and scenario analysis.

Accounting organizations do a good job in preparing reconciliations — bank transactions with records, sub-ledger and general ledger balances, annual report schedules to reported numbers, to name a critical few. The value of these tools increases when we expand their scope and draw insights from them. For example, periodical customer and vendor reconciliations for the top accounts can be extended to highlight process issues that could cause serious customer dissatisfaction or attrition down the line. Reconciling open purchase order accruals to materials received without purchase orders can uncover un-booked costs that affect periodic financials. Reconciling customs paperwork with inventory can reveal scenarios that could prevent a large customs audit and exposure down the line.

For CFOs looking to renew and strengthen the core analytics function within their organizations, there is good news. The power of analytics is embedded in each function and sub-function within the organization. By developing a deeper understanding of the functional metrics to extract more information and using their offices to publish this information, CFOs can add value and speed to their function. This process can be made a lot easier and smoother by finding a knowledgeable partner that can bring in change management discipline and deeper global industry insights.