Eightfold Path to Working Capital Nirvana


Divya Kumar

May 21, 2015

This blog is Part 2 of a 4 part series on Working Capital.

As I described in my first blog in this series, Working Capital management is no longer purely a Finance prerogative, it has become an ongoing exercise that touches almost every department and process of the company. Analytics helps to scrutinize every part of the chain to identify and push levers to enhance Working Capital:

Account Payables (AP):

  • Procurement: It all starts here. The terms set by the Procurement department, PO compliance and the relationships maintained with the suppliers all have a downstream effect on Payables balances. Most companies have centralized the procurement organization to get better terms at better prices with higher control. Now, they are also using deep dive analytics on Spend and Terms information to identify problem areas and define specific solutions.
  • Payments: Analytics on the latter part of the Procure-to-Pay cycle helps to plug process gaps in payments. It identifies issues such as inaccurate matching of POs with invoices and sub-optimal payment runs. By analyzing early payment discounts, we can optimize the trade-offs between discounts received and interest paid. Additionally, we can apply algorithmic controls to standard ERP controls to prevent duplicate payments.

Account Receivables (AR):

  • Order: The supply chain department plays a key role in the Order-to-Cash cycle. Order analytics helps to minimize revenue leakage and optimize orders. Efficiency in processing of orders, on time delivery and minimization of returns/damages, all impact Accounts Receivables. Understanding the end-clients’ purchase order systems in detail ensures that documentation is accurate, preventing disputes or payment delays at a later stage.
  • Invoicing: An efficient invoicing process ensures that invoices are sent immediately post delivery of the goods, and that invoices are accurate to avoid disputes and non-payment. Working Capital analytics also helps identify reasons for disputes and takes both corrective and preventive action early.
  • Collections: This has become an area of much larger focus in the last decade. With targeted analytics by category and customer we can put clear collection strategies in place to reduce Days Sales Outstanding (DSO).
  • Account Management: The qualification of clients and setting of terms is not a one-time process of gauging their credit worthiness. Credit policies need to be frequently looked into while factoring in past experiences with each customer. A variety of complex models are currently being used to arrive at credit scores of customers based on external and internal inputs. Identifying customers with multiple terms also helps firms consolidate and negotiate better terms. 


  • Planning: Inventory planning has taken on a whole new dimension in recent years. Demand forecasting has become critical and accuracy demands collecting information from as far down the supply chain as possible. Complex analytical models and intelligently placed triggers can enable clients to plan the tightrope walk – in other words, minimizing inventory to avoid bloating working capital while having enough inventory to not lose revenue opportunity or reputation. The use of metrics such as Economic Order Quantity (EOQ), Reorder Quantity (ROQ) and Reorder Levels (ROL) help to determine the size and frequency of orders.
  • Sourcing to Delivery: The Procurement function plays a key role by selecting the most reliable suppliers so that the purchase of goods can be delayed until just before the point of use to avoid excess stock or maintaining a high level of safety stock. With the help of Cloud-based tools such as Capgemini’s IBX platform and right-skilled staff, some clients have even moved to vendor managed inventory (VMI). This enables better focus on slow-moving or excess inventory and their root causes. Applying analytics to the optimization of production cycles, warehousing and distribution has led to fundamental changes in operations. Excess inventory leads to cash being tied up in other aspects, such as additional warehousing capacity and write-offs due to obsolescence or damages. Executives are also focusing on more strategic decisions such as standardizing components and rationalizing the number of SKUs, colors, sizes etc. to reduce inventory.

As we see in the graphic above, with a deep dive, Working Capital Analytics morphs from a financial exercise into a cross functional one. As I said in my first blog, Working Capital strategy has unchained itself from the Controller’s desk and landed on the CEO’s desk, making it all the more important to trace the chain all the way from the financial KPI to the operations driving it.

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