When companies embark on transformations, they naturally focus on the big picture: how a transformation will allow them to perform better through cost-out measures or how they can implement high-impact growth strategies to become bigger, leaner, and better.
In companies’ rush toward change, however, they often end up overlooking or deprioritizing the impact that improving their net working capital can have as they begin the transformation journey, potentially thwarting early momentum for change.
There are many long-established ways that companies can pursue cash optimization, though much depends on the market environment. The recent increase in capital costs, for example, has heightened companies’ awareness of the cash conversion cycle and the trade-offs that may come with some investment decisions. Under these conditions, traditional methods of cash optimization, such as extending payment terms with suppliers, are not as effective; suppliers are less likely to extend terms because they would have to fund the extension with their own capital.
Instead, our experience in the field has shown that making even small changes in three areas—mapping processes across the cash conversion cycle, adopting recent technologies, and deploying performance management capabilities—can help companies generate momentum early on in their transformations. This can, in turn, create behavioral and cultural shifts and sustained commitment to change. A focus on these three areas could help companies optimize their accounts payable and receivable balance by 30 percent or more in a matter of weeks, often without requiring significant supplier or customer interaction.1
Let’s take a closer look at each of these three strategies and how they can improve coordination among functions to create momentum early in a transformation.
Mapping out processes
As direct connections to cash flow, purchasing and sales are two obvious yet important parts of an organization that can be refined to save money in the long run. Mapping out the sales and purchasing processes over time can reveal bottlenecks and areas for improvement. Streamlining and automating these processes can accelerate cash conversion cycles and improve liquidity, often with limited effort. The opportunity is often larger in an organization that has neither centralized operations based on business units or geography nor a clearly defined structure of process ownership.
To improve the purchasing (procure-to-pay) cycle, three actions prove successful; all are opportunities for companies to enhance their due diligence in simple, impactful ways.
Review and clear invoices ahead of time. Companies can clear invoices before paying them to verify their accuracy compared with what was agreed upon contractually (considering price, volume, and terms, for example). Taking the time to assess these details can allow companies to more proactively reject invoices or withhold payment when mistakes are found.
Review discounts offered by suppliers. Companies should perform regular checks and trade-off calculations based on discounts they’ve been offered for guaranteeing early payments. These checks and calculations can be especially helpful when companies contend with the increasing cost of capital. For example, a 0.5 percent discount in exchange for paying 30 days earlier is a different discussion in a 5.0 percent cost-of-capital environment than a 10.0 percent cost-of-capital environment (Exhibit 1).
Build a pay schedule. Although it’s seemingly obvious, companies should establish a payment schedule to avoid paying invoices early and processing payments daily and should instead batch payments to a weekly, fortnightly, or even monthly schedule. Building a pay schedule serves an operational purpose (by saving time on issuing payments by batching them) and helps organizations delay payments by a handful of days. Many organizations establish their payment schedule in a forward-looking manner and pay invoices that aren’t due until the next payment cycle. This approach can create a negative cash effect, however. Instead, organizations should establish and communicate a payment cycle with vendors (highlighting the associated cash-flow predictability it offers to suppliers) and adopt a backward-looking approach that pays any invoices due since the previous payment cycle.
Improving the sales (order-to-cash) cycle entails implementing initiatives to enhance the efficiency, accuracy, and speed of the invoicing process and systematically managing overdue invoices (Exhibit 2).
Making these changes will realign incentives in the organization across both the commercial and credit management teams by, for example, allowing them to send timely, high-quality invoices rather than rushing to invoice to recognize revenue. This change, in turn, enhances the customer experience and prevents businesses from losing income unexpectedly. Companies can improve the sales cycle in three ways:
Optimizing the customer onboarding process. Optimizing the customer onboarding process at contract setup can allow companies to avoid issues later and reinforce strategies for net working capital. Companies can adopt and enforce global-standard payment terms, run customer credit checks, implement credit limits, and develop clear guidance on how to integrate customer portals into structures for master data management. These efforts can help highlight outstanding invoices and encourage customers to pay on time.
Improving the billing process. Making improvements to the billing process allows companies to issue accurate invoices to the customer quickly once the product is delivered or the service is completed. Companies should track all necessary proof points—for example, the customer’s signature upon service completion—to avoid issues later that could result in disputes and ensure that the invoice is checked for quality and accuracy before it is sent out.
Setting up the collection process to manage both nondisputed and disputed overdue invoices in a systematic manner. Companies can establish a strict and automated dunning process for overdue invoices that are not disputed by sending a reminder to the customer a few days before the invoice’s due date as well as frequent, escalating follow-ups once the invoice is past due. They can also introduce a best-in-class dispute management process with clear reason codes, dispute resolution owners assigned to each reason code, active tracking, and daily updates.
An advanced-electronics company put this strategy in place when it faced significant challenges in collecting payments from customers. The company conducted a comprehensive investigation of its order-to-cash cycle using analytics, a cash culture survey, and interviews among stakeholders across the organization. The investigation revealed several process breakdowns in billing and collections across services.
For example, required information and customer signatures were not systematically collected, leading to errors or missing information in invoices, which customers then disputed. Additionally, the company’s strategy for offering incentives focused on invoicing rather than collection, which created a sense of urgency in issuing invoices without ensuring they contained the correct information. The credit management team was left attempting to collect outstanding amounts with a limited basis for defense. Performance metrics were outdated, and overdue management and dispute resolution calls served more as status updates than opportunities to address issues head-on.
To resolve these issues, the company implemented an accounts receivable task force and undertook a comprehensive revision of the invoicing process. Incentives were realigned to prioritize cash collection. This combined effort is expected to result in a 20 percent improvement compared with the company’s accounts receivable baseline.
Adopting new technologies
Identifying issues with strategies for net working capital and improving these processes can be even more effective and sustainable when augmented by technology. Machine learning (ML) and AI can transform the way organizations manage their cash and improve overall operational effectiveness, especially when it comes to inventory management and collections processes.
Inventory management. ML and AI can improve demand forecasting accuracy, optimize assortment and inventory levels, and provide real-time visibility and metrics to enhance supply chain performance, reduce costs, and generally increase supply chain efficiency. With real-time data and predictive algorithms, ML and AI can provide accurate demand predictions, automate manual processes, and make data-driven decisions to optimize inventory management.2
Collections processes. ML enables organizations to predict customer payment behavior by segment and on an individual basis and allows organizations to advise collections teams on where to focus their efforts by, for example, showing them where to put in place timely credit holds to mitigate the accumulation of overdue invoices. Some companies are starting to integrate generative AI into receivables management workflows by having it analyze historical payment behaviors of certain customer personas and automating follow-up processes with at-risk or defaulting customers. These assessments then allow companies to tailor their approach to credit management. For example, it can help determine which customers should be encouraged to switch to a prepayment model.
Deploying performance management capabilities
Effective performance management is essential for optimizing cash flow and involves setting clear objectives, monitoring performance against these objectives, and making necessary adjustments to more effectively reach goals. These capabilities work hand in hand with advanced technologies.
Best-in-class performance management involves providing all stakeholders with the information they need to make timely decisions. AI, business intelligence, and data- or process-mining tools can provide real-time insights into cash positions, forecast future cash flows, and highlight potential issues before they become critical. For example, techniques such as variance analyses and invoicing or SKU-level data deep dives can help identify deviations from expected cash flow patterns and spur timely corrective actions.
Moreover, by analyzing large data sets, companies can gain insights into cash flow trends and identify inefficiencies. For example, predictive analytics can help forecast demand more accurately, reducing the need for excess inventory.3
All relevant levels of the organization should monitor the established KPIs, including the CFO. This responsibility does not sit exclusively with the finance team but instead requires cross-functional ownership across the commercial, purchasing, supply chain, and finance teams. Therefore, a clear and practical policy framework to guide frontline workers on daily decisions should also exist. For example, by determining their optimal price tag (payment term versus percentage discount) in advance, leaders can better manage trade-offs between pricing and payment terms.
By embracing new approaches and leveraging advanced technologies, organizations can get their house in order early and create momentum when kick-starting a transformation. Additionally, they will optimize cash flow, improve liquidity, and enhance resilience, which will prevent them from making reactive decisions during more tumultuous times.4 Businesses that master cash management will be better positioned to seize opportunities, drive growth, and emerge stronger from economic uncertainties.
