Align Finance, Operations to Improve Working Capital - CFO Magazine


While so many CEOs and business owners here in the San Francisco Bay Area are hyper-focused on growing sales and revenues almost to the exclusion of anything else, CFOs are equally focused on improving Working Capital efficiency in order to improve cash flow.

However, as this excellent recent article from CFO Magazine illustrates, “There are goal conflicts that decrease the improvement in a company’s working capital and cash conversion cycle. These conflicts stem from the lack of alignment across the operational departments of a company.”

The 3 key drivers of the cash conversion cycle (and cash flow) are:

  • Days Payable Outstanding (DPO) (“How many days to pay vendors”)

  • Days Inventory Outstanding (DIO) (“How many days of inventory we have”)

  • Days Sales Outstanding (DSO) (“How many days before we get paid by customers”)

Clearly, increasing Days Payable by carefully managing vendors and / or reducing Inventory Days or DSO will improve cash flow. However, this is often easier said than done:

“Reducing DIO, usually managed by the chief operating officer, is considered the toughest area to improve. But over time, companies have dedicated substantial resources to improving the physical supply chain and minimized inventory to safe levels. The need to effectively manage inventory levels is also usually well understood by operations.

"The CFO has more control over change in the DPO and DSO metrics. Collecting receivables faster is straightforward, but the sales team may try to boost business by offering longer payment terms to customers and thereby increasing DSO.

"In terms of DPO, procurement and sourcing teams may negotiate 30-day payment terms with suppliers because that’s the way “it has always been done.” To be sure, a balance is required to maintain proper corporate performance. But a better understanding of the need to improve working capital and how the improvement benefits the company will help align the goals between finance and operations to meet corporate objectives."

Read the full article

#cashflow #workingcapital

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