By Geri Westphal
A working capital committee is an effective way to better track and manage the company’s operating liquidity.
The creation of a working capital committee (WCC) is an effective way to better track and manage corporate priorities as it relates to the overall management of the company’s available cash and other measures of working capital.
Strong discipline in working capital management leads to strong discipline in operations, and by linking working capital objectives into an overall corporate strategy or ERM program via a working capital committee and corresponding governance framework, treasurers can ensure ongoing senior executive review and support. The key is to get the executive level sponsorship needed to form a working capital committee in the first place.
As noted at several treasurer-level NeuGroup meetings in 2013, the importance of executive-level sponsorship when setting up a WCC cannot be overstated. Members offered a variety of outcomes where they were outperforming specific metrics when sponsorship was strong and underperforming when it wasn’t.
For most firms, after spending significant time on process improvements over the past several years, implementing a working capital committee to govern a firm-wide WC management program is the next logical step to ensure these new processes and procedures stick and bad habits don’t redevelop.
This is also apparent in The NeuGroup universe, where nearly 50 percent of respondents from several treasurer-level NeuGroups said they have a WCC. Many more are anticipating the creation of such a committee as organizations continue to look across the entire organization in a more holistic manner to develop corporate-based ERM programs and other governance frameworks to complement FP&A and the controllers organization to better align planning and reporting with corporate performance objectives set in working capital terms. In addition, the WCC, in reviewing working capital performance and risk across the entire business can help facilitate organizational cooperation, process change, and break through bottlenecks that might otherwise exist.
Member feedback from The NeuGroup points to accountability and improved communication between business units and treasury as two of the most important advantages to having a senior-sponsored WCC.
who is it?
Committee membership most often includes the CFO and all direct reports, senior leaders from manufacturing, supply chain management and procurement, as well as executives from various subsidiaries as appropriate, based on their business reporting structure.
Having these key players on the working capital committee helps senior management focus on key balance sheet drivers while providing a forum for discussion. By having a working capital committee in place, functional areas were held accountable for necessary working capital improvements that would contribute to the increase in shareholder value.
Where to begin
Centralizing financial transaction processing and cultivating cross-functional engagement are seen as the first critical steps in creating the corporate-wide structure that will help lay a strong foundation for significant improvements by aligning working capital management processes with the overall corporate strategy. Most organizations have already taken steps toward centralization either as a fully centralized structure, or with regional processing centers to consolidate synergies across global regions.
With the base in place, the next important step is to develop and prioritize the implementation plan that will establish key roles and responsibilities for ongoing engagement. The implementation plan is most often created by team leaders from across all major functional areas of the business. This plan should outline what relevant metrics will be tracked and by whom.
The results of these metrics should be compared to a carefully selected group of peers relevant for your industry, to ensure an apples-to-apples assessment and appropriate actions should be identified when statistics fall below peer comparisons.
Put a Number on It
Members found that placing a monetary value on a particular opportunity within the working capital management program was a great way to garner support and align organizational priorities. Everyone can understand the hard dollars associated with a particular initiative. One member of The NeuGroup’s Treasurer’s Group of Thirty described an example of how their key metrics lag behind industry peers for their Days Working Capital calculation and how an improvement in this metric would have a significant cash flow opportunity of $1.6bn to $4.0bn when moving from their current status to the peer median and then to best-in-class. These real world examples can help get everyone’s attention and drive toward the achievement of common goals.
Another important reporting deliverable is to develop a concise dashboard that will summarize all relevant metrics and publish this report on a frequent basis to senior leaders. For the purpose of the executive review of the working capital management results, you should limit the number of metrics being reported. The idea is not to flood senior management with scores of graphs and statistics, but to refine the reporting to the handful of metrics deemed most relevant..
Collect, Measure and Analyze
The next step is to identify the relevant key drivers of working capital management and use these key drivers to develop metrics and monitor results.
Treasury and finance are typically the most concerned about working capital and cash flow, but all functions across the entire organization have an impact on the current and future patterns of cash flow and working capital. Therefore, it is extremely important to engage the business units and help train key decision makers on how they can positively impact working capital and the individual key metrics they have chosen to monitor.
A key component to garnering support across the organization is to design custom metrics that are relevant to your individual business model. Some of the most common key metrics include; Days Sales Outstanding (DSO), invoice error rates, uncollectable AR, Days Payables Outstanding (DPO), and working capital as a percent of sales.
What’s most important is to choose relevant metrics and begin to measure them. You can’t improve what you don’t measure, so take time to decide what’s most important to your organization and what metrics can have the highest impact.
When deciding the appropriate measures to capture and monitor as part of your overall working capital management program, here are some things to consider:
- Purchasing: Analyze spending data to gain efficiencies. Use trend analysis, compliance statistics, category management
- AP: Reduce AP expenses and travel expenses through automation, electronic invoicing, paper scanning
- AR: Increase efficiency and timeliness of collections, evaluate average daysdelinquent, and percentage of outstanding AR that is considered current
- Cash management: Analysis of discounts and best use of cash
By creating an effective working capital management committee and overall reporting structure, treasurers can help make valuable contributions to the efficiency and cost savings of the organization by helping the organization efficiently manage risks and drive greater shareholder value.