Bottom-line Tip #6: Use cross-functional teams to tackle working capital improvements

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According to an analysis by Booz & Company, over $950 Billion is sitting trapped on the balance sheets of public companies. Often companies will assign people from specific functions to try to improve working capital. Sales tackles accounts receivable, procurement goes after accounts payable, and operations takes on speeding up inventory turns. “Unfortunately, these efforts often fail in the aggregate. They reinforce the silos that already exist and overlook the interdependence among functions that have led to poor working capital performance in the first place.” (Source: Strategy & Business)

Instead of taking a silo approach, form a cross functional team to look across the entire working capital process. Sure you can use consultants to help, but a lot of the capability already resides within your company. It’s just a matter of tapping the right people and giving them the right mandate. Some examples of potential quick wins click for full list:

Accounts Receivable

• Stick to standard terms and conditions for new contracts, varying only by the type of customer (high volume, low volume; high customization, low customization; and so on) involved in the agreement. Review existing customer relationships to ensure the cost of capital is covered.
  
• Create incentives to accelerate payments, particularly from large customers, using as the context overall industry structure, negotiations on price increases, and willingness to pass along drops in commodity prices, among other things.
  

Accounts Payable

• Segment supplies on the basis of their value and condition. Strong suppliers with rigid payment terms are not likely to be flexible, but suppliers that are adding little value (such as those, for example, buying metal and making only minor changes to it before shipping it out) or those that are in financial difficulty will typically offer lower prices for quicker payment terms.
• Address supplier volatility by linking the cost of business processes with the target market for specific production streams, i.e., low-margin products should enjoy the most inexpensive terms from suppliers.
• Review contract terms across business units, suppliers, and product types and normalize them around the best practices you identify in the process.
• Segment supplier credit terms and identify opportunities to leverage trade credit on terms that are less than your cost of capital.

Inventory

• Segment production flow into categories that align with specific customer order patterns.
• Cull marginal SKUs that drive inventory growth without commensurate benefits to the end customer.
• Integrate the inventory requirements of the supply chain into purchasing decisions and customer contracts.
• Identify and eliminate the root causes of process variation to reduce inventory requirements.
  

For more examples and tools you can use to improve working capital, see "$950 Billion in Extra Capital” as it appeared in Strategy & Business and plan to attend FAO Summit to learn directly from your peers.