Crunch Time: How Shared Services Can Enable the Release of Working Capital to the Business
Working capital is in large part made up of trade debtors, trade creditors and inventory. Without working capital, a business, simply put, cannot "work." The efficiency of the individual elements of working capital is usually measured by Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO) and Days Payable Outstanding (DPO). While this sounds like alphabet soup, the measurement equation is straightforward: DSO plus DIO less DPO is used to reflect how much working capital is tied up at any time in the end-to-end purchase through to sale process. The more that can be released from these three significant elements of the company’s balance sheet, the more cash is available to fund it and oil the wheels of business. As cash itself is an asset, there is also a direct correlation between effective management of cash and effective business operations.
Because Shared Services Organizations (SSOs) often own large parts of the end-to-end Order-to-Cash (O2C) and Procure-to-Pay (P2P) processes – as do Business Process Outsourcers (BPOs) – they can have a substantial impact on a business’s working capital. SSOs can significantly improve DSO through effective management of the accounts receivable, credit and collections functions. DPO can also be impacted by tight procurement processes, effective management of accounts payable and the vendor database. When the procurement function is part of the SSO, negotiation of better payment terms with suppliers can also improve DPO. DIO is usually less under the control of a SSO as inventory is very much tied to the manufacturing and logistics functions, which typically do not sit in an SSO. SSOs working closely with the treasury function can also better manage and control actual cash (e.g. through cash pooling and automation with partner banks).
With sharp economic downturns in most parts of the world, the focus on working capital is becoming greater than ever. The credit crunch has significantly impacted the availability of additional cash. But effective SSOs can help reduce DSO and better control DPO, and also enable tighter management of vendors and negotiation of better terms (including whether or not to pay earlier and take early settlement discounts, or pay later and preserve cash). Tight control of A/R and A/P also allows management to make more effective decisions around optimization of working capital and cash.
Highlighting the significant opportunities that exist to release cash from working capital, REL-Hackett’s 2007 Working Capital Survey found that:
- The top 1,000 U.S. companies have the potential to liberate an additional $877 billion cash from working capital
- The top 1,000 European companies have the potential to liberate an additional €725 billion cash from working capital
With cash much tighter than it has been for many years, it is imperative that companies manage working capital as efficiently as possible to release cash to the business. The opportunity is there…and effective SSOs can be a life vest!
About the Author
Phil Searle (email@example.com) is the Founder and Managing Director of Chazey Partners Limited, which provides business advisory services in Finance, Shared Services, Business Process Outsourcing and Technology. Prior to establishing Chazey, Phil for nearly 20 years held operational roles in Finance and Shared Services, including Group Vice President and CFO of Cendant TDS’s International Markets Division and Corporate Controller and Head of Worldwide Financial Shared Services at 3Com Corporation. He is a frequent speaker and chairman at Shared Services events around the globe, and has published a number of articles on shared services, outsourcing and technology enablement.
This article first appeared in SSON's May 2008 Finance Services eAlert. For information on how to register for this targeted e-Alert click here.