Not all working capital optimization projects are equal. Once your company has decided to tackle this area, a number of decisions will need to be made. From setting out your objectives to adopting a strategic approach, here’s what you need to consider:
First and foremost, it’s important to be clear about your goals from the beginning of the project. Failing to identify the scale of the working capital optimization opportunity may lead to short-sighted and unambitious goals, resulting in a program which fails to deliver significant value.
When setting your goals, benchmarking against industry practice can be invaluable. While there are many sources which provide information about payment practices in different industries and locations, this information typically covers a wide range of different types of payables. Sources based on actual payments data are likely to provide a more granular level of detail.
Companies should also consider their entire supplier base when planning a program, factoring in the financial position of the players in the supply chain and the cost of capital they face.
Also important is the need to differentiate between a tactical and a strategic approach to working capital optimization.
The differences between the two not just semantic. A tactical approach – such as using tools like reverse factoring or procurement cards in isolation – can enable companies to address specific issues, such as alleviating the impact of extended payment terms on suppliers. However, tactical measures cannot deliver the full potential of the supply chain opportunity. In order to achieve a more meaningful change, companies need to focus on more strategic objectives:
Once you’ve set your optimization goals, another crucial step is to select the right partner for your program. Partner organizations such as fintech platform providers, finance providers and working capital consultants can play a vital role in helping you measure the size of your opportunity. However, it’s important to work with organizations which have the skills, expertise and experience needed to help you achieve your goals.
When choosing a partner, you’ll need to take a number of considerations into account. For one thing, you should ascertain whether the partner’s goals are aligned with your goals. Where technology is concerned, it’s also important to look at factors ranging from ease of use and the availability of human support to whether the functionalities included deliver added value.
Likewise, your partner should be able to give you insights that may not otherwise be available. For example, AI technology can proactively identify the best time to make early payment offers to suppliers.
Last but not least, the business case should be built on an ROI that considers the value the partner brings, rather than on cost alone.
The next blog will look at the metrics you can use to measure the success of a working capital optimization program. For the full guide click here.