Treasury is in the driving seat. But it has to take the rest of the organisation with it.
Who owns working capital? That was the question debated by participants at the latest Working Capital Forum, held on this occasion as one of the streams at Basware Connect in London’s Docklands.

The answer on which the Forum agreed, the treasurer, may perhaps have been obvious. But the discussion raised interesting and helpful nuances and issues that are important to consider if a working capital management programme is to achieve optimal success.

Ad Van Der Poel, Basware senior vice president of financing services, said that responsibility for working capital varies from one organisation to another but that generally the responsibility winds up with the treasurer. “They are very focused on cash flow and trying to forecast cash flow, but they don’t necessarily take on the working capital element.”

He noted, however, that “Having the head of procurement talk to the head of treasury hardly ever happens – but if you want attack working capital, attack SCF, that’s exactly what needs to happen. The procurement person is the one that has the focus on the supplier and the supplier flows and supplier relationship.”

“Make sure you have sufficient influence”

One treasurer taking part in the discussion said, “My mandate as treasurer is to bring together AP and AR and any other source of working capital and manage that section of the balance sheet. You can’t be a manager for all of those areas because it’s very complex and time-consuming but you need to make certain that you have sufficient influence across those areas. You need to make certain that there is a reporting line back to those areas. You need to open those lines of communication.”

There are times when you have to “flex your muscles” to get those communication lines working – “But you have to be able to show people that you are adding benefit to the organisation by assuming that responsibility.”

One participant told how responsibility for working capital was given over to a new role about a year ago, with AP and AR reporting into it and working with the treasury and procurement teams. The new role reports into the group financial controller. Treasury had come to realise that it was “unsustainable” to always have “battles with procurement over micro things such as the number of vendors signing  up to a supply chain finance programme.” So now, responsibility for working capital sits in a specifically-assigned role. “It’s not quite the treasurer but it’s someone whom the finance director can tell to make working capital ‘happen’,” he explained. “And if the FD needs to bash heads together that’s what he’ll do.”

The perils of accurate forecasting

One treasurer from an industrial sector acknowledged the difficulty of defining the trade-off between having surety of supply by carrying high levels of inventory whereas the demands of working capital management might require lower stock levels. “Accounts payable and accounts receivable is relatively simple. We have a lot of capital tied up in inventory in the supply chain. We have long lead times and the business sometimes struggles to forecast demand,” he said. In that business, it’s the divisional finance directors who have a closer eye on working capital while the group treasurer’s role is to have oversight – “and financing the working capital!”

Another participant said that his company has a 100% track record when it comes to cash forecasting: “Every single time we got it wrong.” But that’s not a bad thing: “As a treasurer, you have to be very careful not to fall in love with your forecast. If you do, you become resistant to things that are good for the business that interrupt your cash forecast.”
He said that if your forecast is always right, then it’s like a conversation between two people: “If we both agree with each other all the time then one of us isn’t thinking. If your forecast is right all the time, your control is too tight.”

Another shared her experience of a company where accounts payable was simply pressurised by procurement. “They don’t realise the cost they are saving and the cost they are incurring. That analysis is not being done and it’s something I’m bringing into the company: more visibility. Everybody should know that anything that they commit to when they negotiate is going to impact working capital.” She added that even in situations where contracts are discussed and signed off by finance, finance itself may be focused on the bigger picture but not discuss with treasury the issues relating to borrowing costs.

“Surprisingly, a lot of buyers don’t manage money at all,” said one participant from a retail sector procurement background. “Therefore, if treasury were accountable for working capital, they have to have responsible people around the organisation to actually deliver it. If you are the owner of a budget and creating contracts, you need to take the full cash implications with that. Treasury can be the policy owners, but then spread the word and get people to buy into best practice.”

Supply chain finance is offered to suppliers as part of one participating company’s corporate social responsibility “to do right by our suppliers”, the Forum heard. Though there is a cost to suppliers to take advantage of SCF, they can effectively use the financial strength of their large, blue-chip buyer to get paid more quickly. “Our focus is on improving relationships with suppliers. That’s more of a conversation we have than what’s our cash forecast for the next quarter.”

The key to performance indicators

How important are KPIs to change the culture of functions such as procurement, which have cost-savings rather than cash management built into their DNA? “More modern CFOs and CPOs are much more akin to changing the KPIs so it’s not just about getting a good deal,” said one participant. “They have a much broader range of levers and drivers that make them a good procurement function.”

Summarising the discussion, Mike Hewitt, managing director of Adaugeo Media and chair of the Working Capital Forum, said, “So where does responsibility for working capital lie? It’s the treasurer. Ultimately it’s the CFO, but it’s going to be treasury that drives it. And it can’t be done without the active participation of procurement and other areas of the business.
“But optimising working capital is not about pressing a button or putting in a solution. It’s a re-engineering of how the corporation works to change things like reporting targets. We heard about the vital importance of inter-departmental cooperation, a strong senior financial lead and that KPIs and bonus structures need to be adjusted to make sure that the incentives are aligned with what the corporation wants to do.”