The Hackett Group has released a new research paper focusing on seven steps for releasing cash before the end of this year. The key is achieving this while establishing a healthy, sustainable working capital management lifestyle for the long term.
The Hackett Group’s 2018 Working Capital Survey reveals a massive opportunity to free over $1.5 trillion in cash across the United States and Europe. This opportunity is cash tied up in receivables and payables. In the United States, the receivables and payables opportunity represents $334 billion and $358 billion respectively. The opportunity in Europe is similarly sized, at €353 billion from receivables and €394 billion from payables.
Accessing this cash to show a healthy balance sheet is the primary driver for year-end gamesmanship, also known as the “dash for cash”. The result may well meet market and shareholder expectations and have a positive impact on share price. However, playing the year-end game is only successful in the short term. Companies that access this cash and improve their cash conversion cycle over the long term reap greater rewards. They achieve sustained working capital performance and a subsequent increase in pro t. Every seven-day reduction yields a 1% improvement in margin. For a company with an earnings before interest, taxes, depreciation and amortization of 5%, that equates to roughly a 20% increase in pro t.1
The challenge for all companies, then, is two-fold: How do we release cash from receivables and payables? And then how do we sustain working capital at an optimal level?
Most companies invest substantially more time and effort addressing this challenge at the end of every quarter and scal year than they do during the rest of the year. Closing the books at the end of a scal year is stressful, and at that point many companies believe it is too late to take actions that could release signi cant cash before closure. Instead, they resort to tactics that provide a temporary boost in cash — the two most popular being to delay payments to suppliers and negotiate earlier billing or payments with customers in exchange for discounts. Unfortunately, these moves usually come back to haunt them during the following year’s rst quarter – and the cycle repeats.
Look beyond the temporary fixes
Temporary fixes may produce results, but they rarely lead to sustained improvement. Think about starting a fitness program. If your goal is simply to get fit for the Christmas party, then how likely are you to work out regularly after the holidays? If your goal, however, is to adopt a healthy lifestyle, then you are thinking about how to maintain that new exercise routine on an ongoing basis.
Sound working capital management is, in fact, a lot like adopting a healthy lifestyle. It is possible to launch a short-term dash for cash that reduces working capital in the current year and sets the right foundation for keeping it off the books. The key to achieving this dual goal of quick results and ongoing improvement is to focus on high-impact activities that have a direct link to the underlying processes at the core of working capital management. Organizing these activities in a formal dash-for-cash initiative can help raise awareness and maintain focus on the importance of managing cash across the organization.
Following are seven steps to take prior to the end of this year to address immediate needs. When approached in the right way, these steps can also improve the underlying processes and build a sound foundation for continuous working capital improvement…
To read more, The Hackett Group’s research is available with free registration at this link: http://go.poweredbyhackett.com/dfc1808sm
About The Hackett Group
The Hackett Group is an intellectual property-based strategic consultancy and leading enterprise benchmarking and best practices digital transformation firm to global companies, offering digital transformation including robotic process automation and enterprise cloud application implementation. More information on The Hackett Group is available at: www.thehackettgroup.com, info@