Organisations can improve their working capital by focusing on four key areas according to research by Nordea. The bank studied working capital management across 403 Nordic companies to find out how they are performing and how they are making their working capital more efficient.
Working capital management (WCM) is important to every business, in helping to improve cash flow, enjoy a better return on invested capital and reduce funding costs. At the same time, achieving effective WCM can be challenging.
To find out how the Nordics are faring, our study analysed the key financial metrics of 403 companies in the region over the period 2008 to 2013. Using publicly available sources, the analysis then took a deeper dive into the measures implemented by 15 corporates that significantly improved their days working capital (DWC) to understand how they got it right.
Among the main findings was that capital performance in the Nordics is improving. The study revealed a relative improvement of 6.8% – or five working days – in DWC between 2008 and 2013. It showed that regardless of the industry it operates within, or initial DWC figures, there are measures treasury departments can put in place to improve WCM and it also identified four key areas that corporate treasurers should focus on within their WCM programme.
The key to improving DWC is to make WCM a business priority; all of the 15 companies studied in-depth had done so. WCM should be supported at all levels, but especially by management and C-level executives who need to drive it forward. A WCM programme can be a huge undertaking and can only succeed if it is led from the top.
To help ensure WCM is recognised and treated as a priority, some organisations are tying remuneration for senior staff to working capital targets. For example, Electrolux’s remuneration model for its managers is related to the efficiency of its working capital.
A study of the annual filings for Finnish sporting goods company Amer shows that the company rewards its business area presidents based on working capital, as well as earnings before interest and tax (EBIT) net sales and group targets. Amer Sports also showed an improvement of 39 days or a relative change of 26% in DWC between 2008 and 2013.
Minimising the amount of cash that is tied up in inventory is a crucial part of any WCM programme. To achieve this, the organisations studied looked at measures such as balancing customer demand with supply, and changing the way inventories are managed. Additionally, some had centralised their warehouses and attempted to reduce the complexity of stock keeping.
The study also found examples of organisations using different production models to reduce DWC; for example, by manufacturing customised, low-volume goods to order, but using customer forecasts to plan production of standard, higher-volume goods.
Clas Ohlson, the Swedish hardware store chain and mail order retailer improved its inventory turnover by seven days, according to the company’s annual reports. With inventories and non-current assets making up 90% of its assets, Ohlson designed internal controls that focused on identifying and preventing deficiencies. The company improved its DWC figure by 14 days, or 24%, over the period 2008 to 2011.
Streamlining the supply chain is vital to WCM. A corporate’s supply chain must be lean and efficient as it touches all aspects of the business, from raw materials through to delivery of the final product.
Organisations that improved their DWC streamlined their supply chain by focusing on their relationships with suppliers. Actions taken included harmonising and extending payment terms; rationalising the range of suppliers; and moving more towards in-house manufacturing.
Finland’s Fiskars, known globally for its range of tools, made SCM a focus in 2008 when, according to its public filings, the company created a global procurement strategy, which included reviewing sub-contractor partners, enhancing the efficiency of in-house production, and making the supply chain more demand driven. During the period 2008 to 2013, Fiskars showed relative improvement of 31%, or 36% in DW
Many organisations that had successfully reduced DWC did so by focusing on reducing their days sales outstanding (DSO) figures to improve cash flow. Treasury departments can achieve this by looking at aspects such as invoicing, payment terms and options, and collection methods. The Nordic organisations studied had focused on areas such as optimising payment terms, being more proactive with collections, refining the invoicing process, and renegotiating contracts.
International telecoms and media group Millicom International Cellular reduced its receivables turnover by six days, according to public reports. The company also renegotiated contracts with suppliers, introduced a new purchasing process and reduced inventories, which all added to its better performance. The company improved its DWC by six days, or 28%, between 2008 and 2013.
A long-term programme
Successful WCM programmes are long-term initiatives, supported by all employees and championed by the senior leadership team. There are a number of ‘quick wins’ that treasury can implement, but overall WCM is a company-wide, strategic initiative that touches all aspects of the organisation. While it is true there is no magic formula for achieving WCM excellence, the four key areas that were identified in the study can assist corporate treasury in guiding and establishing effective working capital programmes.
By Robin Bergholm, head of working capital management, corporates and institutions, Nordea and Joonas Junttila global business developer, trade finance sales development, Nordea