Winning by the                                                            Numbers                                   Follow...
or try to calibrate their forecasting                         For example, Company A’s sales                              ...
Figure KeyKey performance vs. operational metrics for payables, receivables and                                     FIG. 2...
FigureComparison between days to term and days to cash and days-to-cash                                     FIG. 3 3: Comp...
5.	 ross-departmental collaboration that                                         C                                        ...
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GDS International - CFO - Summit - Europe - 2

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REL Winning-by-the-Numbers

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GDS International - CFO - Summit - Europe - 2

  1. 1. Winning by the Numbers Following the right metrics can boost working capital efficiency In lean and volatile times, a high-quality Key performance indicators working capital management (WCM) KPIs are easy to derive and understand, system can make all the difference and they help executives track the between a profitable and an unprofitable health of the entire business. Most year – and sometimes even mean companies already track a number of survival. KPIs, such as days payables outstanding (DPO), days sales outstanding (DSO) With credit tight and customers and days inventory outstanding (DIO), and suppliers both anxious, many and hold certain finance and operations businesses now have little margin for stakeholders accountable for them. error. A superior WCM system helps restore that margin, by enabling the High-level working capital metrics such company to reduce supply chain risk, as DSO are an essential part of any avoid paying high fees for third-party working capital improvement program, financing and better coordinate its but only a part. While KPIs can indicate how well a specific area of the business operations with customer demand. is operating, they do not necessarily Most of all, superior WCM frees cash explain why the business is succeeding for investment that would otherwise or struggling. Only an investigation into be locked in inventory, payables or working capital processes and how the receivables. resulting numbers affect operations Robust WCM systems always begin with can enable analysts to discover the why metrics. Working capital metrics – or behind those numbers. key performance indicators (KPIs) – for The clarifying data for such questions is account receivables (A/R) processes, not difficult to find. Many manufacturing for example, help managers quickly companies spend a great deal of determine how much of the company’s effort forecasting sales at the product cash is tied up in A/R, and isolate pain level, for example, and typically points in the process – where they submit extensive forecasts based on a originate, how they interrelate with the combination of sales and historical item company’s operations and what effect usage. Yet surprisingly few companies they have on working capital. forecast both inventory levels and DIOs1 I REL I Winning by the Numbers © 2011 REL, All Rights Reserved.
  2. 2. or try to calibrate their forecasting For example, Company A’s sales accuracy against past performance. organization – which owns debt and Even fewer look at the respective values is ultimately responsible for DSO of DSO, DPO and DIO metrics at the performance and collections that are next organizational level down. Such past due – strives to improve working clarification is where operational metrics capital by implementing a dedicated come into play (Figure 1). collections team that provides key reporting elements, such as customer Operational metrics payment performance and levels of past Operational metrics are a specialized set due collections. This data helps the sales of metrics developed by working capital team negotiate shorter payment terms. analysts to better measure the success To track the effectiveness of setting of the company’s working capital more favorable terms in order to improvement program. Analysts often further collection efforts, the sales team begin with KPIs used effectively in the derives deeper operational metrics by past, such as DSO, best possible days conducting a more detailed analysis. sales outstanding (BPDSO) and aging They look at analyses of payment balance. For example, if an analysis of terms and contractual terms, number of the company’s numbers indicates to contracts deviating from standard terms managers that they need to take a look and number of customers exceeding at receivables processes, analysts might credit limits (per salesperson), and derive new metrics such as days billing contractual terms versus weighted outstanding and weighted average days average days payment terms (WADPT) unbilled to improve overall DSO (Figure 2). versus weighted average days to cash (WADTC). Terms versus WADPT versus To be truly effective, such operational WADTC, for example, are broken down metrics need to provide the type of even further to reveal whether terms detailed information that can easily be are respected at the invoice level. If used to perform a root-cause analysis. contractual terms are not being met, Such metrics can become quite the salesperson intervenes to resolve granular. disputes and remedy late payments, Figure 1: Monitor KPIs to develop operational metrics and resolve business issues FIG. 1 Monitor KPIs to develop operational metrics and resolve business issues Analytical Root Cause Established Problem Questions Analyses Metrics • SLOBs (slow- • How can writeoffs • Historical inventory • Ongoing inventory moving/obsolete) be reduced? analysis segmentaion and inventory is • How do current • Customer classification increasing credit limits segmentation and • Excess credit limit • Customers are compare with credit limit analysis metrics bumping up historical spend? • Supplier spend, • Terms adjustments against credit limits • How much have terms and payment by spend metrics • Increasing supplier increased supplier analysis terms are terms impacted impacting DPO DPO?2 I REL I Winning by the Numbers © 2011 REL, All Rights Reserved.
  3. 3. Figure KeyKey performance vs. operational metrics for payables, receivables and FIG. 2 2: Performance Indicators indicators (KPIs) vs. operational metrics for payables, receivables and inventory management inventory management KPIs Total Management Focus Working Capital Performance Receivables Payables Inventory Management Management Management Headline KPIs Headline KPIs Headline KPIs SUPPORT Receivables Payables Inventory Operational Focus Management Management Management Operational Operational Operational Reporting Reporting Reporting which improves receivables numbers metrics will be forgotten or duplicated, and boosts working capital (Figures 3 or new metrics created unnecessarily. and 4). For example, a specialty chemicals Dashboards and visibility: Better company with $5 billion in annual reporting facilitates better analysis sales and 100+ manufacturing facilities Such new metrics may initially require developed a performance metrics and an investment of time to develop and working capital dashboard to monitor gain traction, but handled well, they working capital performance at the eventually pay off through significant local operating level. The company savings in cost, time and effort. tracked a variety of metrics, including supply chain training and inventory One number alone cannot tell the whole classification and reduction at multiple story, but triangulate that number with a plant locations, to facilitate a fast, complementary operational metric or KPI, sustainable inventory reduction of and the story writes itself. A few additional 13 percent within 3 or 4 months of metrics can make a major difference in the implementation, and an additional 6 depth of understanding about underlying percent reduction forecasted within 6 working capital conditions. to 12 months. Seeing the results on its An increasingly effective way to make working capital dashboard enabled the these processes more visible is to create company not only to improve its supply dashboards that not only tie metrics chain management but to make further of related processes together, but also gains in its working capital efficiency. provide visibility to different levels within the organization. In addition to Converting to the metric system: creating advantages by providing a Making operational metrics effective single view of data to the organization, However, even the best numbers dashboards reduce the likelihood that will not accomplish the intended3 I REL I Winning by the Numbers © 2011 REL, All Rights Reserved.
  4. 4. FigureComparison between days to term and days to cash and days-to-cash FIG. 3 3: Comparison between days-to-term Days Value 80 1.0 70 72 67 0.9 70 65 65 63 63 60 59 0.8 60 57 54 52 0.7 50 50 0.6 48 49 47 40 45 45 45 44 45 0.5 43 42 40 0.4 30 DTT = Days-to-Term: Based on the 0.3 average of the agreed payment terms 20 0.2 with the customers at invoice level 10 DTC = Days-to-Cash Based on the 0.1 average of how the customers have 0 0.0 actually paid the invoices Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AMOUNT DTT DTC Figure 4: Accounts receivable monthly dispute report FIG. 4 Disputed AR report Millions % 140 90 80 120 70 100 60 80 50 60 40 30 40 20 20 10 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan OVERDUE CURRENT % OF AR (TOTAL) objective without a commitment the authority to sponsor and mandate by the organization to act on them. this type of change Establishing effective metrics for 2. lear targets that define success or C working capital performance requires failure in a given area consensus across functions within the organization about which numbers 3. compensation structure that A matter most and then holding members supports adherence to operational of those functions accountable. metric targets Implementing an effective operational 4. erformance and system metrics P metrics program requires five that are part of the company’s daily elements: process, which are monitored all the 1. Buy-in from finance, operations way from front-line employees who and other relevant departmental have a direct impact on the results to leadership within the company with the executives who review them4 I REL I Winning by the Numbers © 2011 REL, All Rights Reserved.
  5. 5. 5. ross-departmental collaboration that C time, or even phased out to make way challenges organizational departments for new analytics that provide more to actively manage their own pieces relevant insights. Improving knowledge of the working capital puzzle to affect over time requires that not only mustDelphine Hopital organizational changeSenior Consultant management priorities continue toREL evolve, but that the meaning of each Only a first step Finally, because good metrics are crucial metric is probed again and again. Often, to an organization’s success, they need the significance of a given number can periodic review. While some numbers decrease over time, or even vanish remain perennially important, others completely, as market conditions need to be reexamined from time to change. To receive a complimentary cash flow assessment, visit www.relconsultancy.com/ cashflow/ or call us at 1 866 614 4059 (North America), +1 770 225 7500 (International) or +44 20 7398 9033 (Europe) and take the first step toward releasing more cash from your operations today. www.relconsultancy.com About REL REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT), is a world-leading consulting firm dedicated to delivering sustainable cash flow improvement from working capital and across business operations. REL’s tailored solutions balance client trade-offs between working capital, operating costs, service performance and risk. REL’s expertise has helped clients free up billions of dollars in cash, creating the financial freedom to fund acquisitions, product development, debt reduction and share buy-back programmes. In-depth process expertise, analytical rigor and collaborative client relationships enable REL to deliver an exceptional return on investment in a short time frame. REL has delivered work in over 60 countries for Fortune 500 and global Fortune 500 companies. 5 I REL I Winning by the Numbers © 2011 REL, All Rights Reserved.

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