Working Capital is the key indicator for capital tied up in the company, equivalent to the sum of accounts receivable and inventory minus accounts payable. Most companies focus on inventory management to control working capital levels, while accounts payable is often difficult to influence due to supplier pressure. However, significant potential for improvement lies within accounts receivable management, which is often neglected by companies. Key to success is the improvement of collections and dispute resolution cycles. To achieve this, Lansdowne has developed an innovative and proven three dimensional customer segmentation matrix approach that delivers significantly better results when targeting tied- up capital reduction.
Our experience in Working Capital engagements shows that typically 80% of savings result from accounts receivable optimisation while about 10% is delivered by inventory reduction and accounts payable optimisation respectively. Consequently, accounts receivable reduction is the most effective way to start a Working Capital improvement project.
Accounts receivable improvement requires cross-functional commitment and continuous communication to achieve sustainable change in the key Working Capital improvement processes: new customer set up, sales and contract management, risk management, order processing & billing, cash targeting & collection management, cash allocation, dispute & deduction management. Accordingly, DSO can often be significantly reduced, overdue receivables even cut in half in the short to medium term to deliver substantial benefits.
DSO as a key performance indicator is an important metric to measure the success of Working Capital improvement projects and to prove its independence from sales. Statistically, about 1/3 of DSO improvements result from payment term standardisation and about 2/3 from improved collection strategies. To ensure a smooth transition to new processes and methodologies, projects need to be well prepared and implemented professionally. Miscommunication with customers and incomplete or disjointed implementations are factors that can jeopardise customer relationships and put sales performance at risk. Bearing in mind that businesses are highly diverse, every company requires a specially tailored and customised approach to Working Capital optimisation. “Off the shelf” solutions are a dangerous undertaking.
Lansdowne’s experience is that a holistic approach covering all three Working Capital related areas can unveil the complete list of client’s shortcomings, often linked to each other. As mentioned, these shortcomings, such as excessive issuing of credit notes, can result in significant losses and reduction of a company’s overall profitability.