Insider Business Club: working capital management

Gavin Hinks, Mark Palios, David Santaro and Martin Williams

What skills are needed?

Martin Williams, managing director at credit information specialist
Graydon UK

To win this war of creditability, you have got to be realistic and have an
understanding of working capital improvements that are factored into your
forecasts.

You can look at the ledger and apply resource to all debts over 90 days. But
unless you change the working practices at the front end, you will constantly be
spending your scarce resources on collecting debts that you shouldn’t have to
collect. In professional services firms that’s looking at how you take on
clients and how you evaluate those customers in terms of their credit worthiness
and their ability to pay.

There is a lack of the skillsets required to really manage working capital.
Most companies are too small. They are run by managers who know how to make
widgets, but it’s the expertise in terms of managing the financial aspects of
the business that is sometimes lacking. That’s not a criticism, it’s just a
fact.

If you haven’t got the skillsets in-house and if you can afford it, outsource
it. You can give some of your work to a debt collection agency to collect cash
in or go to a factorer and let them do the credit checking and collection for
you.

Does it vary across industries?

Mark Palios, turnaround specialist, former Football Association chief
executive and former partner at PricewaterhouseCoopers, where he pioneered
turnaround techniques

There are two distinct ways of approaching working capital management. One is
through what I call the war footing where you apply resources and basically just
beat it down. The second is where you go to a more systemic change, and in
certain industries it will be a cultural change, for example in professional
services where there aren’t many levers to pull.

The classic way to deal with cash flow is to stretch your own creditors. In
addition to that you need to look at the longer-term sustainable features. This
is where your management information is key.

Do you know what working capital is absorbed by carrying those product lines?
Apart from being given the opportunity to get rid of them it will stop you
building them up in the future.

And while you move into new areas of business which are recession proof you
may tie up more working capital.

Bankers can only ever get to a secondhand understanding of issues such as
working capital. The onus is on you, the management, to be able to explain. And
you can only do that if you have a cogent, thorough and disciplined approach to
working capital management. The acid test is the cash that you put in the bank
account.

Is there cause for optimism?

David Santaro, executive partner at IBM Global Business
Service

The operating cash flow for the top 500 organisations in the UK has dropped
by 16% over the last year. The banks are going to lend eventually and they will
get back into growth mode.

They are going to put more scrutiny on organic generation of cash flow or
organic release of cash flow liquidity management and forecasting management. I
think we will see more organisations adopt an alignment of incentives against
working capital management and cash management.

There is a knee-jerk reaction from many organisations to outsource, not just
IT but business process outsourcing as well. However it needs to be driven by
the impact on service levels.

Looking at outsourcing as a solution to cut costs alone is a problem. The
cost savings are significant if it is done right but it has to be very tightly
managed during the scoping process.

Planning processes are starting to change and technology is enabling that.
Forecasting processes are being overhauled and again technology is at the heart
of that. But technology is just an enabler. You have to look at the process and
how you manage stakeholders internally and externally.

Like everyone else, I read the paper every morning and it’s doom and gloom,
but I think there is a silver lining in all of this. The economic environment is
a wake-up call; sooner or later the downturn will reverse and organisations will
start investing for growth. It is more about creating a sustainable capability
and a sustainable competency around working capital and cash management.

Chaired by Gavin Hinks