Discussing Working Capital from an industry segment perspective?

[Patrik Havander]

Hi Benche members,

Improving the working capital is on all corporate agendas right now. Coming from the bank perspective I am curious to know how corporate want to excel in this field. There are of course several articles, reports & conferences that highlights this topic on a general basis but very few high lights this topic from an 'industry segment' perspective?

Are you in a B2C industry with a positive working capital as a starting point e.g. travel industry. I would guess that you only have a limited interest in a working capital case study from a B2B with negative working capital. The comparisons can of cause be much more granular. In my world a discussion around successful working capital projects with industry segment peers would be the way going forward. Would be interesting to hear some thoughts on this topic.

Sorry for a long question but the answers can be short and snappy : )

[Jacob Koch]

Improvement of working capital should be on the agenda of all corporations, since surplus capital is one of the most fundamental necessities for running a business – and since it cost money to have access to capital – all companies should look at their operation to see where some of the capital can be unlocked.

Even B2C corporations with a surplus in working capital, should focus on improving it and look at it as its own business area. An airliner or a travel agency where the customers pre-pay for the services should look as this capital as a separate business area and place the money where it makes most benefit – most of those companies does not have a large profit margin – even a small increase of the profit margin because of a better managements of the funds, will have a huge impact on the bottom line.

To answer the more general question of how to tangle the Working Capital question, I would start at looking at the following questions:
1) Do your company have any policies regarding
a. Account Receivable: What credit policies are in place for the customers?
b. Account Payable: How does your corporation does its procurement?
c. Inventory: Turnover and Mix of inventory
2) Does the data shows that your company are actually following the policies ? Have you ever looked at this ?
3) What is the plan for the recovered cash:
a. New Investments
b. Reduce debt level
c. Payout to owners.
To begin with I would look hard at the 20/80 rule and only go after the big fish. It will help producing results quickly and show the organization and the management that this is an interesting source for capital.
Any thoughts ?

[Patrik Havander]

Hi Jacob,

Thx for your reply. I agree on what you are saying. I might have put my question a bit unclear. In short, would the working capital discussion become more interesting/insightful if e.g. construction companies learn about best practice working capital projects from other construction companies. Retail companies learn about best practice working capital projects from other retail companies?

cheers

[David]

Jacob, I agree with your outline of the importance of working capital.

I have a few times discussed a cash management policy with companies to complement the financial policy.

The cash management policy should include the point you are describing and possibly also:

- Procedures for debt collections
- Clear authorization structure when it comes to opening bank accounts setting up overdrafts etc.
- Clear strategies for funding subsidiaries and how to handle excess cash at subsidiary level
- Strategy for forecasting incoming and outgoing payments

I also agree that once the structure / policy is in place start with the big fish or one area at the time. I know a couple of companies that started with looking at credit terms and debt collection procedures. It is fairly easy to compare with peers in the same industry and for example look at account receivables outstanding (number of days) and see if your company is on par or not. It is not uncommon that subsidiaries within the same organization selling the same goods are using different payment terms towards their customers and different discount methods etc.

[David]

Patrik,

I definitely think there is much to gain from gathering companies from the same industry and discuss common challenges. There is of course always the issue of competition and reveling secrets to a competitor but on the other hand for example a travel company competes with travel packages to nice destinations in the Mediterranean’s but all of them would benefit from smooth solutions with regards to the financial environment.

[A.R. Malaket]

Hello Patrik and All,

I concur that such discussions are timely and that having the corporate and commercial voice at the table can be quite enriching. I can imagine some sectors with both advanced views and unique requirements where a sector-specific discussion may be best, but I suspect for many, even the process of participating in such an exchange will be valuable.

It is in the public domain, so I can share that I was engaged by BNY Mellon in 2010, to chair a series of "Thought Leadership" roundtables (including one in Stockholm, greatly enriched by the participation of Patrik Zekkar of SEB), some of which included corporate participants - with very interesting exchanges resulting from those sessions.

Such discussions would certainly assist trade and transaction bankers in the shift from a product orientation to a client and solution orientation!

Best Regards,
Alexander