Other people's money
A flexible and logical approach to resolving a company’s liquidity problems yielded a working capital return that was four times target. We lay out what happened, and how.
Background
Orson (not the real name) was a US-owned consumer brand with a global following. It had dominated its sector for decades and had maintained profitable results, even though the 2009-10 recession. Revenue had then fallen, but the falling debtor book had meant that the business had steadily released cash. Since then, however, the group had recovered sales; but with these sales, came an increased need for working capital.
The company was suffering cashless growth.
There was a separate business turnaround - but as part of that project, its working capital problems were highlighted. Acute, potentially; chronic and endemic, for sure. The company was aware of the problem, but was applying a random approach.
We were brought in to give direction.
Approach
We are approach-agnostic. Rather than attempting to force a standardised methodology onto its clients, we draw on a range of tools that are appropriate to the circumstance.
The traditional approach used (with very limited success) is to ‘dash for cash’ by stopping payments and heavily incentivising the credit control team. In time, it fails because it doesn’t recognise that working capital is an output (made up, inter alia, of work done up front, of receivables and future receivables, of payments made by customers up front, and of actual money owed). And if the business doesn’t think about the cash impact of its actions, then cash will not be optimised.
Or, as Drucker would have put it, what doesn’t get measured, doesn’t get managed.
If we can connect the business, we will then release cash
The problem is not always the ‘problem’. We spent the first few days identifying it. It was not an ineffective finance team per se, but that the organisation was disconnected. The hypothesis became, ‘if we can connect the business, then we will release cash’.
An example was for sales. Sales staff were incentivised for closing sales, but not for closing admin; credit controllers were incentivised to write off debts; and billers were incentivised to become passive bureaucrats. If we could ensure that sales staff were paid commission on collectable sales; if we could prevent sales to be written off and if we could encourage the billing team to become pro-active, then we could realise cash. A lot of it.
Knowing where to look
Our process was our solution, but our accelerator was our knowledge. We brought some special skills – financial analysis, project management, strategy, accounting – but the most valuable were 20 years’ experience of treasury finance experience and ACT corporate treasury qualifications. This mean that we got to the real questions much faster. An example was knowing immediately that the company’s technical understanding of Bills of Exchange was incorrect – and recounting the 19th century law that proved it.
Delivery
The plan became one of 3 parts. We needed to produce quick wins; we needed to show the value of joint working; and we needed to connect the business.
And this is what we did. Our approach was to deliver small successes every day – and by doing so, we won support and mobilised people from the business. Through BPR? No, an unconditional focus on the objectives, by ensuring that there were no gaps and no overlaps in our work, and by supporting findings with quality quantitative analysis.
Remaining Agile
The initial successes caught people’s attention, and the structured approach meant that they knew how they fitted into the wider programme. It was time to lever expertise.
There are two ways to deliver a big project. The traditional approach is to bring in a lot of consultants, who think hard and solve some problems, but cost a lot. They also tend to take their expertise away with them, meaning that the embedded team are unable to maintain commercial momentum. This is not our way.
Our way is to mobilise local talent. Agile, an innovative IT project management methodology is a good way, so our consultant formed mini project teams with a high level of autonomy but with short objectives. Moving from objective to objective, with the overall strategy in mind, blockers were overcome by the people most able to resolve them. And it worked. Fast. One IT project was delivered in 6 weeks – the last joint IT/finance project had taken 14 months. Our consultant stepped in to coach team leaders, to solve technical and finance problems when the team became stuck, and to ensure that the teams stayed on focus.
No less importantly, the team members learned more about their systems, and each other, than if they had had a system given to them.
Telling the story
The final aspect of this project was communication. In any project involving hundreds of people, there is a tendency for messages to become confused. We used a simple dashboard to convert almost work packages into one page, and used repeatedly through the project. It saved time, ensured a common message and impressed the CFO’s stakeholders by demonstrating success and focus.
Outcome
We came to the project with an objective to show that working capital was being managed. We came out as a beacon for the rest of the group. We went in with a cash target of 20% of EBIT; we came out with 76%, half realised in the first 3 months. Our payback was 80 times. But most importantly, we helped the group re-connect itself and be ready for growth.