SGS Maine Pointe: Companies need holistic working capital optimization
Faced with tightening post-Covid conditions, companies should create holistic working capital optimization strategies, according to Dan Ginsberg of SGS Maine Pointe.
Ginsberg, a managing director at the Boston-based supply chain and operations consultancy, told StrategicCFO360 in a recent interview that the traditional linear approach to working capital optimization (WCO) can be ineffective.
The typical approach takes a reactionary short-term perspective focusing on a single area, such as inventories. Ginsberg says a better WCO strategy would be comprehensive across the three areas where cash may be tied up – inventories, receivables, and payables.
WCO has taken on added importance as the cost of money has gone up and the number of available sources of financing have gone down.
“Interest rates have effectively taken the topic of working capital out of the CFO’s office and put it on the priority list companywide,” Ginsberg said.
Holistic WCO is a good idea whether companies face immediate risk or not, because unforeseen disruptions can humble even financially healthy firms. “Companies with a sophisticated cash culture will be able to better withstand future periods of slow growth and unexpected challenges like the ones we’ve seen over the past few years, while also maintaining better visibility and control over their cash flow picture,” Ginsberg added.
The three levers
In the past few years, unexpected inventory issues occurred because of Covid-driven issues in shipping and overseas supply. These issues resulted in shortages of goods and a negative impact on cash flow.
Managing inventory problems requires better alignment of sales with inventory, often with the aid of automation and analytics to eliminate mismatch.
Sales and operations planning (S&OP) – under which leaders continually drive focus, alignment, and synchronization across all functions – is one method to optimize inventory levels and free up cash that might otherwise be tied up in unsold goods.
Receivables optimization, meanwhile, might focus on reducing disputes and monitoring the dispute cycle. Ginsberg notes that automation is again a key tool – enabling firms to automatically modify customer terms with appropriate discounts to speed up payment cycles or trigger alerts when human intervention is required.
The third lever of payables can improve cash flow by taking advantage of (and negotiating for) price discounts and payment terms.
The importance of automation
Ginsberg says automation is relevant to all areas of WCO, from analysis to execution – but it doesn’t mean a company can simply set it and forget it.
Instead, automation tools can be used to accelerate tactical decisions for inventories in distribution centers or applied to collections or dispute management in receivables. If used properly, automation can help companies reduce costs, overcome staff shortages, and minimize error rates, Ginsberg says.
