Every CFO likes to keep his organization well capitalized. Hence Working Capital Optimization is a top of the agenda item for any CFO. A well-capitalized firm is the mark of a robust & efficient organization. While it sounds very simple in theory, the operational details of Working Capital Management can get highly complex basis the business environment, the organization operates in.
Working Capital Optimization is all about optimizing trapped cash in all the three areas: Payables, Inventory and Receivables. Inventory management has been a highly focused area, where we have seen several approaches by very well renowned corporations leading to development of great techniques. So let us talk more about the other two parts.
Most of the CFOs use payables a very effective WCO tool. Technology has aided the process improvements in a big way with the availability of world class payables systems. However, technology is as good as the implementation and there still exists issues with mismatched timelines, duplication of vendors, and different terms for the same vendors etc. Organizations have taken a view of payables as a non-core activity and engaged outside parties to perform the task for them with clear guidelines laid out for delivery.
Accounts Receivables is one of the most significant and yet one of the most underrated part of Working Capital Optimization. Most of the time this is taken as part of the business operations which might not be the case actually. CFOs usually grapple with this aspect of WCO on a daily basis with almost negligible control on the levers to control or manage it. In recent times, there has been some assertions from the CFOs office on the way forward and planning on this front. Management of receivables is a science in itself and many segments of industry have developed robust and terrific processes and systems. Consumer product companies and financial services firms have highly developed process backed by technology to have a better control on the AR. However, the story is very different with organization selling to the Enterprise Segment (Business to Business).
Selling to Enterprise predominantly is relationship based selling. Customer buys the sales experience and look to the sales person to provide the right inputs to make the decision. A good enterprise sales person would always ensure that the post buying dissonance within the customers is almost negligible and that is the secret to continued and repeat business. Enterprise selling also is always a group buying activity with many decision makers from the top management of the customers. The Key Account Manager (KAM) has to ensure that positive relationship exists with each decision maker. It takes significant investment of time and efforts from the KAM to ensure great relationship with all stakeholders.
Collections in the Enterprise similarly is a tedious and group activity. Multiple stakeholders are involved in the process and that makes it an extensive activity. Due to its nature of business, enterprise collections tend to be driven by clear deliverables of SLAs signed and the terms & conditions of the purchase orders. Clear documentary proof at all stages for all deliverables are usually required to stake a claim for payments.
Organizations have varied views on the delayed collections in this space. Some consider it as part of business activity and take it in their stride, while some see it as a value add to garner more business. This is surprising as the services and products offered should be the value add and longer credit should not be. And if any customers sees it as a better value add than the products or services offered, then it speaks volumes of both the parties involved in the transaction. This view however, is being shaken up and many organization are focusing on the AR collections in a big way. However, challenges do remain with the collections in this space due to the very nature of business.
It starts with generating the invoice which could contain multiple SKUs with multiple quantities and associated services. The more complex the project is, equally complex the invoice gets too. If there are multiple types of jobs done (civil, electrical, services) then the associated tax structures and segregation of invoicing. This activity can get very complex and requires dedicated specialized resources to perform flawlessly. Add to this, many organizations have started demanding invoices as per formats prescribed in the POs.
In the enterprise space, the requirement of documentation to complete the invoicing activity is substantial. Starting from proof of delivery to multiple compliance documents, the requirement can get tedious. Further, lack of any one document can lead to the entire payment being held.
Repeat nature of business means reconciliation of books is another major activity which is required time and again. While the sales person might be able to handle smaller books here. Complexity here would again demand resources from finance teams. Delivery or perception of it, of services and products as per the SLAs is the biggest hurdle in the entire receivables space. Majority of the customers would bring out the issues during the payment process and a significant time and efforts go in ensuring the satisfaction of the customer. This many a times becomes the most tedious of all as coordination with multiple departments is required to provide the solution to customer.
Many organization believe, and truly so, that sales process is not complete till the payment is realized. And hence the Key Account Manager, or the sales person is required to collect the AR on time. Mostly, the variable payout is linked to timely collections. However, looking at the operational efforts required to ensure collections, many a times, the sales person starts slipping up leading to delayed payments. And quite often, the collection call is combined with the new business calls leading to ideologue clash. Underwriting a customer for credit also is a function of inputs from the sales team and this has an inherent conflict of interest built into it.
Also Read: Eliminating The Challenges in Accounts Receivable Management
Organizations have realized the importance of separating credit from sales and have started doing it. They even have started putting together teams to focus on collections. This team while part of the overall CFO responsibility also has bearing on the entire organization growth. While CFOs do understand that this is not a core activity they would like to develop in-house expertise on, the lack of choices to outsource has hampered the plan otherwise.
If there is one activity which can benefit significantly from outsourcing, it is the receivables part. As it sucks out the bandwidth of the core employees of the organization, the need to have a partner to deliver on this count is the need of the hour. About 22% of human capital in any organization is involved in the collections process, directly or indirectly. Outsourcing this activity can lead to significant productivity of the FTEs.
Organization should work on developing good credit control systems and processes which would use the feedback from the field teams to fine tune the terms during the process of sales to a customer. These credit controllers should focus on developing models which provide accurate inputs to sales/contract management staff for pricing. This has to be the core area for any organization and developing it would yield dividends in the long run. However, the process of collections at the ground level is an activity which can benefit greatly from outsourcing.
There are organizations today who have forayed into this niche space offering solutions which can significantly free up resources to be deployed to more productive work within the organization. Choosing the right partner would provide the right benefits for growth. CFOs should look at firms which can own up the complete collections delivery and work seamlessly within the organization adding value. As the outsourced firm represents the organization, due diligence in terms of the quality of people employed, processes being followed and most importantly the ethical and compliance framework should be evaluated thoroughly before finalizing.
Today a CFOs work does not stop with finance, in fact it begins with that. The requirement now is to be a complete business manager and not a bean counter. CFOs have realized this and are embracing the new requirement, adding significant value to the organization. They are truly the “complete managers“ of today.