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Identify the key operational drivers behind the cash flow outcomes, and then create visibility over their movements to track and improve the performance.
Unlock trapped working capital to invest in growth and reduce debt
This wholesale and supply chain provider supplies over 6,500 products to customers across Europe. As with many other companies, working capital has taken a back seat compared with earnings, driven by profitability as a singular measure of success.
After a change in ownership, the new shareholder wanted more focus on working capital management to free-up efficient-funding that would support their aggressive growth plan.
The clients working capital as a % of sales was at 12% which was 5% higher than the industry average.
We began by analysing the client current working capital positions and compared that with industry benchmarks and competitors which highlighted opportunities to improve in all three areas, but more so in Accounts receivable and Inventory.
We worked closely with the business to identify all the operational metrics driving the cash flow outcome and set targets to improve over 1, 2, 3, 6 and 12 months and assigned responsibility and accountability to staff that had control over the metric. We stood up a program management team to engage managers from across the business and a steering committee to provide C-suite with visibility and a forum to set the tone from the top.
Implemented an automated dashboard with real-time feeds to provide granular visibility into the operational metrics with line-item detail which enabled opportunities and risks to be identified. Incorporated these measures into the cash flow forecasting model to drive the forecasting accuracy.
In collaboration with management, policies and guidelines were set to address trade-offs and exceptions to help steer the process as cash, cost and service started to compete for priority. This included the publication of standard terms (customers and suppliers) with an escalations process for anything outside the norm. An inventory strategy defining the right inventory levels for each ABC class to meet customer service levels, while minimising cost and at the same time preventing excess cash being held up.
Worked with management revising incentive scheme to include cash flow targets that balance the focus between profitability and cash flow management and encourage the desired behaviours.
Working capital as % of sales reduced to 6% freeing up £9m of cash trapped in working capital. The improvement self-financed more than £50m new revenue growth and reduced the revolving credit facility by £4m saving a further £250k in finance cost.
The cash conversion cycle improved from 44 days to 23 days with a reduction in the DSO (from 43 to 35), DIO (from 25 to 17) and DPO (44 to 49).
A further 2% of improvement will be realised over the coming year resulting from contract renegotiations with customers and suppliers when renewals are due.
Reducing the networking capital by 6% resulted in a 5% improvement of the business return on invested capital.
Improved cash flow forecasting by incorporating operational metrics as drivers within the model.