In the first ever episode of Billions, a popular tv series on Showtime, as Bobby “Axe” watches his kids play basketball, his right handman, Mike “Wags” asks him to settle a dispute between “Pouch” and “Dollar Bill”. The dispute centered on whether Axe Capital should stay long or sell short on Superior Auto. “Pouch” was of the opinion that Superior Auto was producing a lot of aluminum wheels because the industry had replaced steel wheels with aluminum wheels in anticipation that sales would skyrocket. “Dollar Bill” who had insider information disagreed. He knew that Superior Auto had over-produced and were stuck with inventory they couldn’t translate to sales. “Axe” settled the dispute by shorting the company, agreeing with “Dollar Bill’s” assessment that Superior Auto had built too much inventory. Enter net working capital (NWC), a measure of the difference between an organization’s current assets (cash, accounts receivables and inventories) and current liabilities (accounts payable and debt). Optimizing NWC is a delicate balance of managing inventory and a sleuth of other levers against the backdrop of sales volumes.
In the 2023 Hackett Group Working Capital Scorecard of the largest 1000 US companies, NWC increased by 11% in 2022 compared to 2021, while cash on hand decreased by 7%, as did total debt. At the same time, accounts receivable and inventories increased – all of this points to the increase in NWC. A Google search to optimize working capital will provide an organization with a body of recommendations including optimizing inventory, increasing liquidity by tapping credit lines, accelerating receivable payments, and the list goes on. But, how about from a process management perspective? Tactically, how does an organization optimize working capital from a business process management perspective?
Optimizing Working Capital
One large French multi-national company with revenues of more than €50B used SAP Signavio Process Insights to analyze its procurement, accounts payable and production process. What it uncovered was surprising: an unhealthy level of maverick purchasing, late and early payments in various geographies, long cycle times for invoice processing, inventory that had not moved in more than 6 months, production orders that were released later than planned and production orders that were even unconfirmed. All of these symptoms directly and indirectly affected their working capital.
In Asia Pacific, a mid-sized capital intensive company with revenues of more than $4B had evolved and expanded into different industries over the years. This resulted in a heterogenous process landscape, which in turn limited the business leadership’s visibility across its operations. Through an ERP upgrade, paired with process transformation, it was able to increase visibility into its stock levels and gain a more accurate view of inventory reorder points. This resulted in an ability to better manage inventory and working capital.
Working Capital Improvement Through Business Process Management
Balancing working capital improvements is a delicate act. Macroeconomic uncertainty has compounded the challenge. Organizations are expected to manage risk and perform contingency planning to support continuous business operations. But, there is a better way forward. Process mining and process intelligence solutions that can quickly scan your operations for inefficiencies and working capital improvement across the entire business landscape is a surefire way of identifying breakthrough opportunities. After all, no executive would want to be blindsided by the issues that Superior Auto was having because of insufficient visibility into its inventory. When it comes to making decisions related to investments and working capital, you never want to be uncertain.
Townsend, S., Bodo, I., Ancius, J. (2023). A Working Capital Course Correction. The Hackett Group. https://www.thehackettgroup.com/insights/2023-us-working-capital-survey-2306/
