Tuesday 22 July 2014

The NAM as cash manager - how Working Capital works...

Given the pressures on sales and profits, major suppliers have turned to improved management of their working capital as a source of cash in the business.

According to the latest  EY 2014 Analysis of Working Capital Management, reported in The Grocer, the world's nine biggest food and drink companies, improved their 'cash-to-cash' days by 15% in 2013.

As manager of the supplier-retailer interface, the NAM is in a position that impacts, and is impacted materially by, improvements in the use of working capital.

Essentially, as can be seen in the diagram, working capital is a combination of Current Assets - Current Liabilities, and ideally should be kept as low as possible in order to improve the ROCE.

A NAM can influence the amount of working capital by better forecasting and promo-planning, resulting in lower stockholding, and negotiating better payment terms to reduce the DSOs, all without jeopardising the business. 

Finally, the full EY Report gives a 13-point Action checklist for optimising Working Capital (more detail here) and I have highlighted those affected by the NAM.

EY 13 initiatives to drive working capital excellence:
  1. Further streamlining of manufacturing and supply chains
  2. Closer collaboration with customers and suppliers, enabling enhanced demand and supply visibility, improved forecasting accuracy and better supply chain reliability
  3. Better coordination between supply, planning, manufacturing, procurement and logistics functions and processes
  4. Improvements in billing and cash collections
  5. More effective management of payment terms for customers and suppliers, including renegotiation of terms
  6. Intensification of spend consolidation and standardization
  7. Implementation of a larger, more unified shared-services organization
  8. Increased use of VMI practices, enabling better ordering, production and delivery planning and scheduling for the supplier, and reduced inventory levels and risk of stock-outs for the customer
  9. Alignment of business processes and information systems up and down the value chain to share real-time and accurate supply and demand information
  10. Increase use of financing solutions as a way to provide attractive and flexible alternatives to customers and suppliers
  11. Active management of the trade-offs between cash, cost, service levels and risks (choosing, for example, between customer payment terms and sales price rebates, supplier payment terms and early payment discounts, or inventory levels for consignment stock arrangements and customer service levels) that are sometimes required with various WC strategies
  12. Implementation of more robust supply chain risk management policies,
  13. Tracking and monitoring WC metrics
By the way, if you need pointers on optimising Working Capital, check out your major customers where, being a cash business, shoppers pay them in cash, whilst the retailer pays suppliers in 40+ days... In other words, retailers use negative working capital i.e. at any time they can have as little as £10 available to pay every £100 they owe...

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