• Posted on: March 10, 2014 by: mardle0312

    Releasing trapped working capital is simply reviewing inefficient processes, whereas Working Capital Strategy is more about delivering an effective financial supply chain.  This means being proactive in areas from strategic alliances to delivering efficiencies in the cash conversion cycle.

    Working Capital Strategy checklist

    Ten tips when reviewing a strategy to achieve working capital optimisation:

    1.   Working Capital Optimisation programmes must extend beyond the finance function and engage the company’s entire managerial team.  Do not think that all working capital management problems can be addressed by treasury alone. Appoint local working capital strategy leaders/champions across the organisation.


    2.   Do not artificially adjust working capital levels through delaying payments to suppliers or indiscriminately stepping up collection activities in order to boost quarter- or year-end performance metrics.  In business, as in physics, every action is met with an opposite reaction.  Delaying payments to vendors may reduce working capital over the short term, but that improvement is likely to disappear over time as vendors adjust their pricing accordingly. Dynamic Discounting is now prevalent.


    3.   Incentivise people to achieve their WCO targets by compensating staff accordingly, particularly at managerial level. User driven key performance and risk indicators should be measure the underlying causes of DSO, DPO and DIO and steps take to monitor and manage findings.


    4.   Make a consistent effort to optimise working capital.  It may be tempting to take the focus away from working capital when the company is growing as there may be less immediate need for it.  Equally, in times of crisis, attention can be diverted elsewhere.  Ignoring working capital could significantly inhibit a company’s ability to grow and meet demand once business rebounds.


    5.   Ensure all hopes are not pinned on ERP implementation.  Although ERP systems can provide significant benefits in the working capital arena, in the near-term they can cause deterioration in working capital performance as key managers and employees are distracted from their daily routines and forced to fine-tune the new ERP system. Mobile applications are proving robust and agile.


    6.   Ensuring suppliers and customers are collaborating effectively is now very much to the fore in demand chain management.  Connect suppliers and customers across the enterprise to achieve maximum benefits.


    7.                  Provide added value for your suppliers.  Major organisations are now using web portals and the like to   deliver seamless accounting transparency for all their suppliers and their financial transactions too, wherever they might be in the world. Supply Chain Finance is now a major part of suppliers funding arrangements.


    8.   Do not allow debt to become overdue before identifying and resolving disputes.  Contact customers before payments are due to resolve any potential disputes and for delinquent payments, assign collection responsibilities to individuals and escalate the responsibility to more senior employees as invoices become further overdue. Have credit management as part of your strategy at Board Level.


    9.   Develop forecasting techniques that incorporate intelligence from all relevant business segments, including not just sales but manufacturing, distribution and marketing.  Evidence from these forecasts will assist in the production of company financial statements to investors re Companies Act 2006 as amended October 2013 re Strategy and Directors Report


    10. Look holistically at the whole financial supply chain.  For example, is there a direct correlation between inventory management methods and the level of customer service that a company can provide?  Do not allow one area to suffer as a result of focusing attention on another.

    An independent cash report (ICR) can be produced to identify whether the organisation is clearly and concisely reporting its cash flow objectives under the mandatory requirement of Companies Act 2006 (as amended Oct 2013) for a Strategic Report and Directors Report.

    The ICR is produced through robust and detailed analysis undertaken by reference to not just the annual report but also all other communications whether they be to investors /shareholders/financial institutions  via interim management statements, employees via pension fund reports, newsletters or indeed to customers and suppliers.

    Narrative, commentary or even recognisable graphs of trend data need consistency and robust reviews to deliver the strategic objective of the organisation in cash terms.

    If one is informing employees/pension fund members of the strategic objective then recognisable graphs of trend data may provide clear communication throughout the organisation of what is required.

    However communication of the same objective to investors/shareholders/financial institutions could require review of the financial impact of certain strategic objectives on the organisations credit worthiness.

    Customers and suppliers, attempting to understand the self-same strategic objective, maybe interested in the impact on contractual terms.

    Why Working Capital Metrics are calculated differently by credit rating agencies and organisations alike.

    Q1 of any new year sees a huge volume of organisations publish their annual reports. The narrative normally eludes to various cash metrics and in particular to working capital.

    However when one reads through these reports to establish a common but significant KPI like DSO, DPO or even DIO, they are not often found and instead other forms of cash metric are used but rarely explained as to why an alternative measure is being used, its relevance to the business its impact – maybe on bonus, maybe on remuneration or maybe on investment decisions.

    The likes of Marston Plc. suggest CROCCE, ITV profit to cash and Nestlé FCCF and yet none are ‘recognised’ by the usual credit agencies.

    Furthermore the agencies then compute DSO, DPO and DIO that does not conform to the usual accounting scenarios and rarely give a reason as to why?

    So when attempting to understand the cash conversion cycle or any working capital metrics one has to be very careful. As providers of such information we establish with the management team how to measure the real changes in working capital through the use of Performance Indicators (PIs) that are a subset of financial KPIs and are owned, measured, monitored and managed by operations.


    The Strategic Report required under the 2006 Companies Act as amended in October 2013 specifically states in Paragraph 12 that in the case of a quoted company ‘where appropriate, include references to, and additional explanations of, amounts included in the company’s accounts’

    Narrative within the Management accounts could contain views from ‘senior managers’ – defined in the aforesaid Act as being a person who-

    a)     Has responsibility for planning, directing or controlling the activities of the company, or a strategically significant part of the company, and

    b)     Is an employee of the company.

    By reviewing management comments, directors should be able to identify KPI’s/KRI’s that they then can provide as evidence to support the Strategic Report , but, with their own narrative, so that per section 14 of the Act ‘disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company.’

    The critical piece in our view is the ability to measure the performance of the organisation, based on Paragraph 5 of the Act, ‘effectively’ which means reviewing trends and strategies to improve performance and delivering action plans that address the cash impact on the organisation.


    Monthly or at least quarterly management accounts are more current that interim management statements (IMS) and statutory accounts which should provide management accountants with an ‘edge’ over their peers.

    Frequency of reporting has increased exposure and therefore pressure on CFO’s and the whole executive team to the point that narrative is somewhat lacking in depth and breadth as it seems many IMS are attempting to ‘hide any surprises.’

    We see on a regular basis reports via social media, analyst opinions, newspapers, disclosures under the Freedom of Information Act and various other media ‘interventions’, that organisations have been ‘found wanting’ when it comes identifying trends in their levels of performance.

    This can immediately be reflected in share prices falling or rising, enquiries being announced, Parliamentary panels being established, various commissions established or indeed the decision for certain key personnel like CEO/CFO to be suspended or ‘let go.’

    The purpose of management accounts, in part, is to reflect KPI’s/KRI’s and various other metrics that support action plans in accordance with how strategy is being implemented.

    The greatest threat to the strategy is normally reflected in cash terms in that once a ‘surprise’- good or bad- is highlighted one should already have reviewed an action plan that puts some cash measures on the impact which could include appreciating what the future impact might be on ‘external’ measures like the market effect on share price or maybe on how the public might reflect on a particular service, a particular political approach etc.

    The Strategic Report required under the 2006 CompaniesAct as amended in October 2013 specifically states in Paragraph 12 that in the case of a quoted company ‘where appropriate, include references to, and additional explanations of, amounts included in the company’s accounts.

    This blog will be developed further to appreciate the affect this will have on Management Accounts.

    Customers and suppliers alike whether they be credit controllers, purchase/ sales managers or financial directors will request a review of management accounts on a regular basis. Why?

    A retained or prospective customer/supplier will want to ensure that their suppliers/customers are a ‘going concern’ at any point in time whether it be placing a new or revised contract, understanding an existing situation regarding a contract or in fact if there is a dispute in the offing whether it be with an invoice, goods/services received or in fact a matter to do with future business.

    The management accounts should not only provide a detailed analysis of how cash is being managed whether it be through DSO, DPO, DIO which are lagging indicators but also the key performance indicators (KPI) and key risk indicators(KRI) that are being measured and monitored by the organisation to manage the DSO, DPO and DIO results.

    Furthermore the management accounts should reflect narrative concerning any changes in financing and strategies being reviewed with regard to contractual terms with both customers and suppliers. Any capex, research and development or significant ‘extraordinary’ outflows of cash re statutory fines, contractual penalties etc. should be risk assessed regarding probability and the cash consequences estimated.

    Posted on: December 22, 2013 by: mardle0312

    Discover how your management accounts improves your credit rating

    1)        Reviewed regularly by lending institutions

    2)        Requested by customers and suppliers alike whether they be credit controllers, purchase/ sales managers or financial directors

    3)        Monthly or at least quarterly accounts are more current that interim management statements (IMS) and statutory accounts

    4)        IMS are normally supported by management account type information and can reflect changes in organisational structure re new appointments, new merger/acquisition activities.

    5)        A quality set of management accounts will identify trends in areas like cash management, market segmentation.

    6)        Management accounts can reflect the aspirations and targets of the organisation

    7)        Action plans are normally identified within the management accounts and how the organisation perceives them with regard to priority.

    Posted on: October 4, 2013 by: mardle0312

    Financial versus physical supply chain a new accounting process

    The financial supply chain is often referred to as being the process of managing the efficiency and effectiveness of the whole working capital ecosystem.

    However the introduction of CAPEX into the working capital equation namely DSO+DIO-DPO as well as the terminology being applied by the newly published FRS102 re debtors are classified as receivables and creditors as payables now requires a new accounting process to be established as more working capital funding aspects are involved.

    There is also a whole new investment strategy being played out by corporates that impact SME’s namely supply chain finance programs like dynamic discounting and furthermore there is the intervention strategies being developed by major players like Sovereign Wealth, Pension Funds as well as the likes of MasterCard and PayPal that can leverage payment platforms to supply working capital funding.

    Add to this the threat to the main banks from the likes of Basel III re capital adequacy tests and the banks lack of focus as to whether to deliver commercial/mortgage type funds to you rather than to support riskier business ventures with their greatly reduced capital funds.

    I therefore propose that the new financial supply chain is renamed as the financial supply process which links the whole working capital and capex chain to the funding requirements of the business.


    If we take receivables the process is from the point of identifying a market, thru sales, thru delivery, customer satisfaction to invoice processing, receipt of cash, posting and reconciliation to all accounts.

    The physical supply chain for receivables is the usual Order to Cash process that sits within the credit control and accounting function in most businesses and is where debtors are part of the physical collection system

    If we take payables the financial supply process would embrace the approval of suppliers via procurement following a strategy that reflected and followed the strategy accomplished by marketing and sales in the pursuit of their targets (including stock and work in progress) plus the businesses capex strategy. These suppliers would eventually become creditors and would be subject to payment in accordance with their individual terms and conditions which themselves would be aligned to funding streams namely operational cash plus short/long term working capital funding streams.

    The business itself would be driven by working capital/capex models that reflect the mix of products, projects and service areas within the business. The strategy being the development of the cash rich areas (current as well as envisaged ) to satisfy stakeholders interests namely creditors, employees, investors, and including future options regarding growth like merger and/or acquisition or disposal.

    Cash conversion cycles are critical as they provide views on liquidity as well as optionality with regard to strategy. The Boston Consulting Group Matrix re Cash reflected such matters in the 1970’s


    A top level example of cash flows and working capital cycles are on a  separate power-point presentation that can be provided upon request.

    Please note the project cycle applies to contract projects in sectors like construction as well as for internal Capex projects and can be applied to marketing, research and development expenditures as they could have projects as defined strands to meet certain strategic goals. For instance market penetration into a new geographical area like Europe could have specified cost, sales and capex criteria within a milestone driven project.

    Finally we need to address the reporting of the new financial supply process. With integrated reporting, future statutory requirements and the need for transparency and good governance around cash re going concern concept the new process identifies the whole cash chain ‘cradle (cash inception) through to grave (cash collection and reconciliation).

    The new financial supply process will map the processes and within its structure highlight the ‘physical touch points’ like invoice raising and invoice receipt as well as map it through to the funding requirements of the business.

    The business can then establish whether it will require short term or longer term funding, or whether it can pay dividends, afford share buy backs, afford M & A, afford pension fund contributions etc.  or a mixture of all these to achieve the strategy.

    ©Copyright John Mardle CashPerform Ltd October 2013


    Funding for operating expenses (OPEX) within working capital i.e. for funding a contract or to pay a VAT bill, in other words a short term injection of liquidity could come through:

    a)      Trade Finance like factoring and/or securitisation of receivables

    b)      Supply Chain Finance like dynamic discounting and/or reverse factoring i.e. payables invoices

    c)        If you have some security then asset based lending might be a way forward.

    d)      Peer to Peer lending otherwise crowd funding/crowd sourcing may assist funding.


    Funding of Capital Expenditure (Capex) within Working Capital i.e. growth capital to purchase new equipment, premises, merger/acquisitions then longer term liquidity could be injected via:

    a)      Asset based lending

    b)      Self-issued Bonds

    c)       Private placements

    d)      Corporate venturing

    e)      Peer to Peer lending

    f)       Business Angels if at start – up stage

    g)      Venture capital although specific focus is required re sector, maturity of company and size of funding.

    However all the above could lead to a use of equity.

    The important aspect with regard to Integrated Reporting is to link this in the reports to the manner in which it is spent. Investors can then see the result of their funding.

    Emphasis is growing on many businesses to reflect the ‘thinking’ behind many of the decisions they make with regard to cash flow and how it is being managed in an efficient manner to safeguard investors cash and earn reasonable returns.

    To enable this to happen business needs to engage in measuring the contracts and projects that are going to eat into the operating cash of the business. Contracts that have high revenue streams, high risk factors and even poor cash flows are certainly the ones to focus upon. But also one cannot take the eye off marketing spends that could need project managing so that timescales and costs are not overrun and generate long term and sustainable cash flows.

    Furthermore CAPEX projects should be similarly accounted for as cash can soon haemorrhage from the business and the project not only generates cash issues but causes inefficiencies within working capital areas namely stock, work in progress and could escalate to impact debtors and creditors too.