Working Capital Management

Trend Definition 

What is the essence of this trend? What is its impact? 

• Essence: Working Capital Management (WCM) strategically balances a company's current assets and liabilities to optimise the cash flow
• Impact: Optimised WCM helps companies to respond more quickly and efficiently to price increases and helps them to pay their bills on time as well as to finance loans through their suppliers

Trend Drivers 

Why is this trend emerging now? What’s changing? 

• Economic Preparedness: Companies proactively fortify financial resilience with WCM amid economic uncertainty, ensuring optimal cash flow to weather downturns
• Interest-free Short-term Loans: Optimal working capital management enables companies to use their accounts payable as interest-free short-term loans, which decreases their cost of capital
• Technology Advancements: Digital technologies offer new opportunities for optimising WCM. Tools such as process mining can help streamline Net Working Capital (NWC), enhancing the ability to adapt to new market dynamics

Use Cases 

How to apply this trend? 

• Financial Agreements: Supply chain financing and longer payment terms
  Example: P&G announced longer payment terms to their suppliers to improve their working capital, moreover, they offer supply chain financing where they pay their invoices after 15 days, most likely connected to a discount, helping them to increase NWC and decrease Procurement costs
• Cash Flow Strategy: Collect early-pay late to finance the business by suppliers
  Example: Apple is known for superior cash flow and Supply Chain Management by having short DSO and DIO and long DPO which enables procurement teams a better cash base to flexibly source products

Procurement Relevance & Response Strategies 

How should Procurement adapt its Processes, Organisation, and Strategy?

• Supply Chain Finance: Offer loans to suppliers to enable them to invest in their capacity and to benefit from the strong credit rating of the buyer since they take the loan
• Negotiate Payment Terms: Procurement should extend payment terms to improve WC and only pay earlier than negotiated in exchange for discounts