Working Capital? Working Capital Optimization? What do those words really mean for our clients and why is there a necessity for working capital optimization?

If we think about the majority of global corporations and the need to function profitably, then the conversation about optimizing working capital goes far beyond the CEO’s office. Rather, it’s a dialogue that happens daily between the CFO and the finance team.

Here are a few of the most basic reasons why working capital matters.

• Most invoice settlement processes are paper-intensive and manual

• Invoice-to-pay cycle: 60-120 days (approximately)

• 2 percent 10 net 30: Remains a dream, as most invoices get stuck in internal approvals by the time they get to accounts payable

• 20 – 40 percent of invoices involve exception processing: Double or sometimes triple the transaction’s timeline and cost

• According to the results of a new study from REL Consulting, a division of The Hackett Group, Inc., typical companies potentially miss quarterly working capital forecasts (including inventory, receivables, and payables) by up to 23 percent, which amounts to up to $600 million for a typical Global 1000 company (with $29 billion annual revenue).

• Typically, a Fortune 100 company could generate nearly $2 billion in additional cash annually by optimizing working capital  management to match the performance of top companies in their industry.

• By optimizing working capital, the typical Fortune 1000 company would have an opportunity to net over $680 million from optimizing receivables, over $620 million from payables, and over $680 billion from inventory.

Freeing up Cash in the AP/AR Process 

The financial supply chain, if not managed efficiently, can be a major pain point in optimizing working capital. Accounts payable constitutes the biggest drain in the working capital management of most organizations. In other words, if an organization can manage its cash — its accounts receivables and accounts payables well – most likely it can rein in operating costs. If it can improve its processes and free cash from the balance sheets, it can put the working capital to more productive use and make stakeholders a happy clan.

Manual, error-prone processes have been perennial road blocks in optimizing working capital.  Previous to technology innovation, the traditional processes involved costs of printing and mailing paper checks and stop payments, as well as re-issue costs for lost checks and frauds. From the supplier’s point of view, the lack of visibility and uncertainty around payments hindered cash flow forecasting efforts. The supplier had to maintain excess cash unproductively as ‘hedge’ against uncertainty, thereby tying up working capital in the order-to-cash cycle. Suppliers needed to rely on expensive financing options like factoring and asset-based lending to deal with limited access to capital.

Technology Boosts Performance

As credit markets tighten and earnings are squeezed, finance departments are applying significant scrutiny to the efficiency of their back-office processes in order to generate more capital internally and ‘capitalize’ on opportunities in an uncertain environment. The smart application of technology is helping build agility into the labor-intensive manual processes, increase cash flow visibility, improve the relationship between the buyer and supplier organization, and most importantly, enable working capital optimization.

Today, technology is playing a significant role in helping both buyer and supplier organizations streamline the cash flow and pass along cost reductions. Tightly integrated workflow tools, such as those provided by VWA Capgemini, are known to reap visible results. We offer our customers various financial transformation and process optimization solutions and services. The solutions we provide enable organizations to leverage their enterprise solutions to establish automated financial processes. Through streamlined processes, the solutions enable cost-saving efficiencies and working capital optimization.

So, why does working capital optimization matter? Better processes, better insights, better planning and technical automation – all key components entailed with working capital optimization which allow for us to deliver operational efficiency, cost reduction and increased cash flow our clients.