4 minute read 17 Mar 2021
How to make the financial close more efficient and rewarding?

Why cashflow management and working capital deserve more attention

By EY Belgium

Multidisciplinary professional services organization

4 minute read 17 Mar 2021

Companies that focus on external financing may lose sight of an important source of capital: their own balance sheets.

The recent CFO Barometer measured the maturity of cashflow and trade working capital management among Flemish companies. Mark Sheikh, M&A Associate partner at EY, Dries Telen, Strategy and Transactions senior manager at EY and Jean Gieskens, lecturer at numerous Dutch universities and business schools discuss the results of the CFO Barometer.

  • CFO Barometer

    The CFO Barometer is an independent research initiative of the editors of CFO Magazine in cooperation with EY Belgium. A questionnaire concerning an actual CFO topic was answered by a representative sample of around two hundred Belgian CFOs from medium-sized to large multinational companies.

    The focus of the CFO Barometer is local, so the results are very representative of the Belgian market and as such the CFO Barometer becomes a benchmark tool for the CFO active in Belgium. The results are shown here and commented on by specialists and illustrated with practical experiences.

How do you optimize working capital management?

Dries Telen: “When talking about optimizing working capital management, we have three things to take into account: customers, distributors and inventory. The task is to find a balance between them by making sure that customers pay more quickly, ensuring that incoming invoices are not paid too quickly and guaranteeing that the inventory is sent out as soon as possible. That is not an easy balance to keep in its own right. But that task is even more difficult when you have to try and maintain good relationships with customers and distributors. This focus on maintaining good relationships has become more important than ever before.”

How should CFOs monitor the cash position?

Dries Telen: “Many CFOs have started to follow up the cash position more frequently. A good forecast is essential to know where a cash shortage might arise. A CFO can only negotiate with a bank to solve a shortage when he or she has gained the necessary insights in advance. Especially with companies where the cash conversion cycle is relatively long.”

Mark Sheikh: “The cash swing, the highest and lowest cash position during a certain period, is important to monitor as well.”

Jean Gieskens: “And it is also vital to solve dead working capital, like inventory that remains in-house for too long and invoices that remain unpaid. The shorter the cash conversion cycle, the better. Naturally, this is not possible for all companies, but in some sectors, it should be possible to significantly shorten or negate the cycle by aligning processes and flows better.”

Graph: How long does your cash conversion cycle take?

What are the main challenges for CFOs concerning working capital?

The survey showed that the biggest challenges are:

  1. inventory rotation and obsolescence

  2. planning and forecasting

  3. customers (debtors, harmonizing payment terms, too long payment terms, …)

  4. distributors (too many distributors, timely payments of distributors, …)

  5. the management of different entities

  6. seasonality and predictability

Dries Telen: “Tackling these challenges is more easily said than done. I think it is primarily a must for CFOs to understand the business and to anticipate accordingly, for instance by examining past cases. When we at EY build advanced models, we often take into account seasonality or past trends. Using those insights we can make an estimate for the future and set up a planning. Certain technologies, like machine learning and artificial intelligence, prove very useful here, because the typical problems that arise often have to do with badly performing IT systems.”

Graph: oes automating the AR/AP contribute to a better management of working capital?

Jean Gieskens: “And CFOs need to monitor the inventory better as well. The results show that almost half of the respondents assess the inventory on a monthly basis, and 12% do it even less frequently. It might be interesting to make a matrix of the inventory by organizing its content according to its position in the production process (raw materials, goods in transit, half-finished products,…) and according to the type of inventory (luxury goods, beverages, consumables,...). That way you can more easily identify problem areas and monitor your inventory more frequently at the same time.”

Graph: How often do you monitor the inventory (if applicable to your business)?

How are companies financing the working capital?

The need to finance the working capital fluctuates strongly between respondents. The survey shows that they rely mostly on in-house means and straight loans.

Mark Sheikh: “Factoring is a good method. Yet we see that it is not used much. Only 22% of respondents say they use alternative financing methods, like supply chain finance or (reverse) factoring.”

Graph: Do you use alternative financing methods like supply chain finance or (reverse) factoring?

Do companies create enough working capital awareness?

Mark Sheikh: “67% of respondents have a working capital strategy, but almost 60% have no policies to share this strategy with the rest of the company. And only 42% have working capital targets. This is a missed opportunity. The people that communicate with customers and distributors and the people that manage the inventory (essentially sales, procurement and production), have to be very aware of the company’s working capital strategy and the policies and targets that concern it.” 

Graph: Are there any policies in place that serve the working capital strategy with everyone in the company?

Mark Sheikh: “The best way to create awareness around working capital in a company, is to define and follow up a few clear-cut KPIs. The most obvious are DSO, DPO and DIO, but also OCF and FCF can be interesting. These KPIs should be monitored weekly or biweekly. Communication towards stakeholders is also essential. It is unfortunate that these KPIs receive so little attention. There is a lot of talk about turnovers, EBITDA and bonuses, but working capital does not get the attention it deserves.”

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Cash is king, especially for companies that need cash to remain competitive, to stay financially flexible and to go for potential growth opportunities - or to simply stay alive in these strange times. Cashflow management and the management of working capital is one of the most important tasks of the finance function within an organization. The CFO Barometer surveyed companies on their maturity with cash flow and trade working capital management.

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By EY Belgium

Multidisciplinary professional services organization