A company that manages working capital wisely can fuel healthy operations, enable organisational growth, and create value for shareholders. However, used carelessly, working capital also has the power to extinguish value and leave a company in need of financial support. That’s why the divisional and group CFO Gary McGaghey emphasises the importance of balance and systematic analysis, which can help you identify the most effective, efficient ways to manage working capital.
Here, Gary McGaghey explains how finance leaders can examine the three main aspects of working capital (accounts receivable, accounts payable, and inventory) to identify discrepancies and inefficient processes. With his solutions to these discrepancies and inefficiencies, finance leaders can improve operational efficiency and free up cash flow.
A Systematic Approach to Managing Working Capital
Gary McGaghey explains that companies looking to improve cash flow and stabilise the financial movement throughout the company should apply a cross-functional approach to managing working capital. It’s usually possible to trace an excess of working capital back to an excess of money attached to accounts receivable processes or inventory. In this case, it may be tempting to increase collections efforts, withhold supplier payments, or cut inventory. But these approaches may further aggravate the problem.
Instead, Gary McGaghey recommends taking a systematic approach. He explains that finance leaders should examine and refine processes throughout the value chain to improve the way the company meets both the organisation’s needs and customer needs. A systematic approach can also help companies identify concealed areas where they can free up funds and increase savings, thereby potentially creating opportunities for new equipment, technologies, processes, and policies. Companies should review their processes and policies at least once a year to determine any problem areas and address these before the problems grow further.
How to Boost Accounts Receivable
Companies that have several due and overdue receivables should analyse several areas to improve practices and accounts receivable. Areas to examine may include the company’s processes and policies for invoicing, dunning, and payment reminders, which should be on a timely schedule. Company leaders should consider whether any parts of these processes are slow, as delays can trigger a domino effect of excessive overdue receivables.
Meanwhile, quality-of-service problems in the company can lead to delayed receivables. On top of this, customer satisfaction issues can arise if product quality isn’t up to standard and products don’t meet customer expectations. Further issues can also come to light if order lead times and delivery schedules are slow and/or inaccurate. Gary McGaghey highlights the importance of aligning such timeframes to the payment terms to improve customer service and cash flow.
However, adjusting customers’ payment terms can cause disruption, and you may run the risk of losing customers, especially if you shorten the terms. Gary McGaghey emphasises the importance of making adjustments carefully while attempting to maintain a balance with the customer relationship in mind.
Rethink Accounts Payable Processes With Financial Efficiency in Mind
Companies that are tackling challenges related to accounts payable may find that these challenges inhibit cash flow. But there are often ways out of this cash flow problem. Finance leaders can examine the payment terms they have with suppliers and may be able to negotiate a better deal, considering factors like competitive loyalties, order lead times, complaint ratios, the accuracy of delivery, and the amount of time the company has been using the supplier. All of these factors can affect the payment terms, and a thorough analysis may lead a company to locate a new supplier that can offer a better service, better terms, and/or better rates.
As an added tip, Gary McGaghey reminds finance leaders that they shouldn’t necessarily make payments earlier than they need to. Unless there’s an attractive discount for doing so, there isn’t usually a benefit to the company when it comes to making early payments.
Making a Difference to Your Working Capital
Uncovering opportunities in your inventory can make for a surprising source of cash, one that’s often overlooked. Gary McGaghey suggests that finance leaders start by examining their processes, especially the processes that involve the company’s suppliers and customers, taking note of where they can scale back and where they can streamline.
If you can simplify a complicated product design while upholding quality, you should make a noteworthy difference to your working capital. To achieve this, observe your customer demand patterns and align these with your supplier lead times and production parameters, identifying opportunities to streamline your processes while scaling back excesses and continuing to meet all customer needs. A full end to end review of your production process, from raw material procurement and stock holding, through manufacturing to finished goods stock holding in house and with customers, can often uncover buffers of inventory in the system which are either too large or in the wrong place. Reshuffling these inventory buffers can often increase order fill metrics while reducing inventories and releasing cash.
In short, examining your value chain’s end-to-end process, from suppliers to customers, then cutting the unnecessary from this process, should free up cash.
About Gary McGaghey
Gary McGaghey is the group CFO of Advent International’s Williams Lea Tag, the €1.3 billion end-to-end marketing production and business services group. In this role, he oversees the company’s financial plans, leading essential investment-related decision-making processes and managing a highly strategic finance team. He is also the non-executive director of Fitmedia, an award-winning children’s physical assessment company in the UK.
Before taking on these roles, Gary McGaghey helped several private equity, privately owned, and listed companies achieve immense growth transformations. During his early career days, he worked for Robertsons (Pty Ltd), holding several senior management roles during his tenure, including chief operating officer (COO), chief financial officer (CFO), and vice-president (VP) of logistics. He then moved on to secure senior roles at Unilever, acting as the firm’s CFO, VP of finance, global manager and acquisitions director, and interim chief executive officer (CEO).