working capital management - treasury &...

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Working Capital Management: New Strategies for Maintaining Financial

Strength through Economic Cycles

Prepared by APQC in Collaboration with Ariba

©2010 APQC. ALL RIGHTS RESERVED. of 18

PREFACE As the first quarter of 2010 concluded, senior business executives in the U.S. could see the prospects for economic growth on the horizon. The Great Recession of 2008–09 was winding down, even though slack consumer demand and turbulence in global credit markets lingered.

APQC’s Financial Management Research Team launched a study in April 2010 to test several novel hypotheses about the management of working capital during and after the recession. Our findings, contained in the pages that follow, are supported by robust quantitative and qualitative evidence.

A Stark Lesson Delivered During the downturn, most CFOs and treasurers followed the playbook: they accelerated cash collections, extended payments, and unloaded inventory as fast as possible.

As a result, cash levels of the S&P 500 soared. Many CFOs found themselves hard‐pressed to explain to their boards how they planned to aim those hoards of cash at growth opportunities. Others wanted to use their cash piles to pay off debt, but because they continued to worry about future economic shocks, they hesitated. Meanwhile, with money markets paying only 25 to 50 basis points for parked cash, the pressure intensified.

Looking internally, three out of four CFOs and treasurers told us they did not trust their cash flow forecasts. Some had only a loose grip on impending cash commitments. Others were uncertain how much default risk and slow‐payment risk lurked in their receivables portfolios. Some voiced private concerns that they could not completely rely on banks to fund sales and operations.

A stark lesson was delivered: Cash is a cushion in times of turmoil, but its value is limited when you don’t have reliable information about cash flow drivers or plans to use that cash in economically efficient ways.

The March of Innovators In the pages that follow, you’ll learn how the majority of financial executives polled in this study expect to “take the bull by the horns” and fix their working capital management processes once and for all. Even better, you’ll hear directly from CFOs and treasurers who innovated during the downturn. Some broke the mold by collaborating with suppliers and customers who could not tolerate another squeeze. They all found ways to cooperate without suffering ugly economic consequences. Others moved further into the realm of electronic payment mechanisms, which promise better, faster information about—and control over—short‐term cash flows. Others, still, automated activities in their financial shared service centers so that staff could spend more time proactively managing cash flows, and less time on value‐killing tasks such as resolving invoice disputes one at a time with phone calls and e‐mails.


Where Do We Go From Here? As a nonprofit organization with a 30‐year legacy of objective business research, APQC (American Productivity & Quality Center, www.apqc.org) welcomes feedback and suggestions from our members and report readers. Perhaps you’d like to suggest where we take our next research journey. Please do not hesitate to contact me directly with any comments. All the best, Mary C. Driscoll Senior Research Fellow, APQC +1‐713‐685‐7250 [email protected] www.apqc.org Acknowledgements: APQC thanks Ariba, Inc., for providing funding for our research effort and for collaboration on the study scope. We are especially grateful to Peter Lugli, James Tucker, and Drew Hofler from Ariba for their keen marketplace insights.

The conclusions below are derived from independent analyses conducted by APQC. The report was edited by Mary C. Driscoll and written by Randy Myers, with support from Rachele Williams (project manager) and Susan Elliott Blashka (copy editor) and Fred Bobovnyk (art director).

We are also thankful to the CFOs and other senior finance executives who took time to grant interviews and provide on‐the‐record observations. We are also very grateful to the hundreds of finance executives who took time to complete our survey.

Copyright ©2010 APQC, 123 North Post Oak Lane, Third Floor, Houston, Texas 77024‐7797 USA All terms such as company and product names appearing in this work may be trademarks or registered trademarks of their respective owners. This report cannot by reproduced or transmitted in any form or by any means electronic or mechanical, including photocopying, faxing, recording, or information storage and retrieval.


EXECUTIVE SUMMARY During the recession and credit crunch, many CFOs and treasurers increased scrutiny and discipline over working capital management. The rewards for some were surprising—and now they are pushing for more.

Introduction In April 2010, the APQC Financial Management Research Team launched a study to test several novel hypotheses about the management of working capital during and after the recession. The high‐level findings of that research are summarized in pages 5 through 10; APQC’s in‐depth analyses, including on‐the‐record interviews with nine CFOs, can be found in pages 11 through 18.

The commentary from CFOs is enlightening: It reveals a strategy‐oriented view of the process‐level changes now under way across the land. It’s obvious that CFOs who pay as much attention to operating and process dynamics as they do to strategic planning and capital structure can react more quickly and creatively to sudden economic jolts.

Editor’s note: This research program was made possible with funding by Ariba, Inc.; however, APQC remains solely responsible for the analyses offered.


KEY FINDINGS

Key Finding # 1

Companies are pushing for greater cash efficiency because, in the current economic climate, that can mean strategic advantage.

The worst of the financial crisis now appears to be behind us, yet many CFOs are unwilling to ease off the cash flow throttle. Empowered by their success in refocusing the enterprise on cash flow, some CFOs have come to see the recent financial crisis as an once‐in‐a‐lifetime opportunity to win support for still further improvements in their company’s working capital management processes. Of the more than 350 senior North American finance executives surveyed by APQC in April 2010, three‐quarters said they plan to sustain their efforts to optimize working capital—many focusing first on payments, the area where they have the most immediate leverage. Why? They see the promise of operating as well as financial benefits for their organizations. With muted outlooks for sustainable, strong revenue growth, CFOs are looking under every rock for ways to improve net margins. (See Figure 1.)

We feel a sustainable commitment to improve working capital management would offer clear operating benefits.

Figure 1

The hope is that such sustainable process improvements can produce the following.

• Better visibility and control over cash inflows and outflows, which in turn can reduce dependence on external funding of operations.

• Granular insights on the payment patterns of key customers and, thus, better informed trade‐credit decisions and lower default risk.

• Win‐win financial collaboration with suppliers—for example, use of procurement cards, systematic capture of early‐payment discounts, or other forms of supply chain financing to lessen liquidity pressures on suppliers and reduce buyers’ concerns about potential supply disruption (should a key supplier stumble).

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• Better economic returns on idle cash—for example, by regularly taking early‐payment discounts that offer a term of “2 percent 10 Net 30,” an organization can enjoy returns equivalent to an annual percentage rate of 36 percent. This comes from lowered costs of producing goods or delivering services.

• Faster cash conversion cycles that lead to inventory optimization and lowered costs of supporting infrastructure, e.g., less inventory means fewer warehouses.

• Lowered transaction processing costs in Accounts Payable (AP) and/or Accounts Receivable (AR) made possible by invoice process automation and/or process automation on both sides of the equation.

• With better cash flow control, a stronger voice in negotiations with bank lenders and credit analysts.

• A much stronger position in the face of the next liquidity crisis.

Key Finding # 2

Stronger cash flow control leads to more options for cutting costs and driving yields—but first the paper bottlenecks have to go.

Consider the buyer that convinces a good amount of its supply base to present invoices electronically (using one of several viable options: Web templates, EDI integration, etc.). If there is also a dimension of automatic data capture involved, and if the process is well designed and managed, that buyer can have faster access to higher quality data about when it must fund disbursements and, perhaps, when, where, and how to pursue early‐payment discounts vigorously. On the AR side, similar benefits can accrue.

The finance executives surveyed by APQC indicate that they will be seeking to improve their working capital management processes by focusing on four key platforms:

Platform 1: Strengthening Cash Flow Forecasts Approximately two‐thirds say they are taking or planning steps to improve their visibility into cash inflows and outflows and thus be better positioned for any future liquidity shocks. (See Figure 2, page 7). Better visibility into cash flows yields benefits for finance and the entire company. It gives finance more time and agility to find and deliver cash flows to support sales and operations. It allows for greater flexibility in extending credit to customers and financial assistance to suppliers, which can be critical to growing or sustaining the business. And it alerts finance when it is more prudent to eschew any such efforts in favor of conserving cash to meet soon‐due expenses or long‐term funding obligations.


We plan to improve the visibility of cash inflows and/or cash outflows.

Figure 2

Platform 2: Optimizing Discounts and Timing Payments On the accounts payable front, almost half of the survey respondents say they are taking or planning steps to improve their ability to take early‐payment discounts—the point being to reduce the costs of producing goods or delivering services. For some, the end goal is to improve the timing of payments so that they are not paying invoices sooner than necessary without a concomitant economic benefit. (See Figure 3.)

We plan to improve capability for taking early‐payment discounts.

Figure 3

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Platform 3: Removing Paper Bottlenecks About two‐thirds say they are deploying or planning to deploy innovative technology solutions aimed at reducing the amount of paper moving through their payables and/or receivables processes. (See Figure 4.) After a decade of focusing primarily on removing transaction‐oriented costs, many CFOs now concede that they cannot try to reduce headcount further while tolerating paper clogs in their financial systems. The downside of depressing cash flow intelligence has grown too destructive.

We plan to deploy innovative technology solutions to reduce the amount of paper in A/P and/or A/R.

Figure 4

Platform 4: Accessing Nontraditional Financing Sources Finally, survey findings indicate a new propensity toward corporate payment innovation. This was most pronounced among large manufacturers. Fifty‐four percent of manufacturers with more than $1 billion in annual revenue are open to considering external financing solutions such as business commerce networks that enable fast and easy financing of payables and/or receivables. (See Figure 5, page 9.)

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We plan to consider external financing solutions – e.g., nontraditional networks for supply chain finance or procurement cards.

Figure 5

Key Finding # 3

CFOs will be proactive in evaluating the financial health of suppliers.

About two‐thirds of survey respondents say they will closely monitor the financial health of key suppliers and the ability of those suppliers to ramp up production and service capabilities as the economy continues to recover. Large manufacturers—those with $1 billion or more in annual sales—are even more committed to this effort, with 92 percent counting it among their objectives. (See Figure 6, page 10.)

After a decade of finessing their strategies for sourcing in low‐cost regions of the country or the globe, and after strenuous efforts to lock down procurement deals within highly integrated supply chains (including, for many, the move to vendor‐operated storage and logistics), it’s not surprising that large companies now indicate a heightened sense of exposure to exigencies they can neither detect, predict, nor control.

One can argue that a principal lesson rendered by the Great Recession of 2008–09 was that counter‐party financial risk cannot be easily modeled or mitigated. With that as a backdrop, it appears that a deep sense of fiduciary duty is now prevalent among CFOs, treasurers, and other senior finance executives. To offset that risk, there is a clear desire to double‐down on financial analysis of supply bases. (See Figure 6, page 10.)

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We plan to monitor the financial health of key suppliers and their ability to ramp up.

Figure 6

Conclusion of Executive Summary As more senior finance executives recognize the value of investing to build stronger working capital management capabilities, the demand for better performance will only grow. “Maybe companies need a periodic reminder, but cash that’s tied up in working capital is cash that you can’t use to invest in your business, pay dividends, or pay off pension obligations,” says one CFO who was interviewed at length for the final report. That’s the strategic voice coming in—and it was loud and clear in all the interviews conducted for this report.

The most important takeaway from this survey of senior financial executive attitudes toward working capital improvement may be this: With two‐thirds of those surveyed deploying or planning to deploy technology to reduce the amount of paper moving through their AP and AR processes, and three‐quarters already taking or planning steps to improve their visibility into cash inflows and outflows, the question for everyone else isn’t whether they should do that too, but whether they can afford not to.

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INDEPTH FINDINGS

CFOs Push Changes with Big Picture in Mind MEMC Electronic Materials Inc., a $1.2 billion Missouri‐based producer of silicon wafers, is eager to get a better handle on cash flows. The company recently launched a top‐down, bottom‐up forecasting process aimed at gaining better visibility into its free cash flow, and a better understanding of what’s driving it. MEMC Senior Vice President and CFO Tim Oliver says that under this new arrangement, each of the company’s business units generates its own free cash flow forecasts based on its expectations for profits, working capital, and capital expenditures. The business units also lay out detailed risks and opportunities against these forecasts, which are tied to their quarterly P&L commitments. Meanwhile, the corporate treasury team pulls together its best estimate of enterprise‐wide free cash flow based on trends and known drivers of receipts and disbursements, as well as corporate‐driven line items. “Our goal is to make both forecasting processes better by understanding the gap between the two and the eventual accuracy of each,” Oliver says. The treasury group is still responsible for pulling together the consolidated forecast and advising the company’s board of directors and senior leadership team on what to expect on the cash flow front.

For Oliver, any improvement in this area will be greatly welcomed. “Too often, free cash flow has been this ethereal number that the treasury department spits out at the end of the quarter, with all of us waiting to hear what they tell us,” he says. “I really wish I had the operating leaders coming to me at the end of the quarter and saying, ‘Tim, the good news is I hit my revenue number. The bad news is I’m going to miss my cash flow number by a little bit.’ Right now, they don’t have the tools to make those statements, but I hope to get there.”

To speed the process along, Oliver is now looking to bolt performance management software onto the company’s ERP system in hopes of turning raw data into actionable information much more quickly than his analysts can today. “Right now, my team is spending far too much time trying to extract data and not enough time looking at it,” he says. “We think putting this front end onto our data machine is the most important thing we can do to advance this effort.”

Strategic Deployment of Surplus Cash A strong selling point for CFOs seeking to implement working capital management improvements is that the benefits extend beyond the finance function.

For example, Wellpoint Inc., a $65 billion health insurance provider based in Indiana, found that expanding the use of an electronic payables system has helped the company do a better job of pricing its products and competing for new business. “Interestingly, there are times in our business when paying faster makes sense. Our actuaries are constantly trying to set appropriate reserve levels for claims and to price that next book of business,” explains David Kretschmer, Wellpoint’s senior vice president, treasurer, and chief investment officer. “The faster we get claims in, the faster we can adjudicate them, and the better data our actuaries have to work with. So that is a fundamental goal of the company—first to pay health care providers more quickly, but also to grab that data faster so that our actuaries can do their jobs better.”


Innovations in AP While no one argues that transitioning from paper to electronics is easy, the path forward is visible. In payables, for example, a company might begin by deploying a vendor‐run self‐service model in which vendors submit and track invoices electronically and resolve them electronically. Having electronic invoices, in turn, posted into corporate systems this way eliminates the need to process paper invoices. In conjunction with these efforts, the company might also embrace the use of procurement cards for as many purchases as possible, dramatically reducing the number of payments that must be made and making it easier to keep track of purchases. As indicated in the Executive Summary of this report, the majority of surveyed finance executives say they are looking at the use of procurement cards and AP automation.

Meantime, Spencer Schwartz, senior vice president and CFO of Purchase, New York‐based Atlas Air Worldwide Holdings Inc., says his company embarked on the AP automation process in stages beginning a few years ago. As a result, the global provider of air cargo assets and outsourced aircraft operating solutions has been able to reduce its AP head count by approximately half and has become more adept at paying invoices in a timely manner. Schwartz suspects that its AP process improvements allowed the company to avoid some of the prepay requirements imposed on competitors during the credit crunch. In fact, because it has become so much faster at processing payables, the company also has been able to capture more early‐pay discounts. Now, the company is looking to automate its procure‐to‐pay process even more deeply. (See example below.)

Atlas Air: Automation Efforts Take Flight

As a world leader in aircraft operating solutions, $1.1 billion Atlas Air Worldwide Holdings, Inc. serves more than 270 destinations in over 100 countries. Tracking all of the goods and services it purchases to keep its fleet of aircraft in the air—and matching those purchases with contracts, purchase orders, and incoming invoices—was creating a paperwork challenge. Atlas and Senior Vice President and CFO Spencer Schwartz are turning to technology to address it.

“Due to our global reach and broad scope,” Schwartz observes, “sometimes it was hard for us to get the visibility we wanted into our accounts payable transactions, particularly in terms of matching transactions against contracts and purchase orders. We were doing too much manually, with information coming in on paper and payments being delayed. The company saw a lot of opportunity for improvement.”

The first tentative step toward automation was made when the company hired a third‐party firm to begin keying invoice data into its computer systems, after which it began convincing vendors to simply submit invoices electronically rather than on paper—an exercise it says was met with reasonable success. The company soon stepped up its efforts with the implementation of an invoice management software package that enables the receipt of electronic invoices and links to the company’s general ledger software. Just with these


improvements, the company’s ability to pay invoices on time improved dramatically.

Now, building on its spend management solution, Schwartz says Atlas is trying to move beyond invoice processing to create a holistic, end‐to‐end procure‐to‐pay process in which it can electronically capture information about goods or services provided to it, at the point they are provided, and then match an invoice to the authorizing contract or purchase order automatically.

“The ideal situation is that we equip a station manager with a handheld device,” Schwartz explains. “This person would be able to select, planeside, from the services that they want performed on one of our aircraft, and which vendors they want to perform those services, and automatically generate a purchase order. Once those services have been provided, an invoice would link to the purchase order, and if everything matched, there would be no further human intervention. Our finance personnel would assume more of an exception management and analysis role.”

Schwartz says Atlas Air has already implemented the first two phases of this system, which focused on contract management and electronic sourcing, and will roll out the final phase, which will offer the ability to automate a three‐way match between contract, invoice, and purchase order, over the course of this year.

While Schwartz expects the new procure‐to‐pay system will yield cost savings and improve Atlas’ ability to manage cash, his bigger goal, he says, is to make sure the company gets billed accurately, matches invoices against contracts, and gains better visibility from its vendors. “We think that by doing this we’ll be able to drive better decisions on which vendors we use and ultimately drive better pricing on our purchases,” he says. “The byproduct is that we’ll get even better visibility into our processes and better manage things like early payment discounts. We believe this will give us a competitive advantage and differentiate us for some period of time.”

Moving Away from Paper Many finance executives see automation as one of the primary keys to reducing working capital and driving better visibility into cash flows. They also know that it can significantly reduce operating expenses. On the payables front, according to one CFO interviewed, studies have shown that companies can save as much as 50 percent of transactional costs by converting from manual to electronic processes.

By eliminating or minimizing tedious paper shuffling, companies can streamline the finance organization and, sometimes, reassign finance personnel to higher‐value activities, according to Edward White, senior vice president and CFO of $7.1 billion Owens‐Illinois Inc., an Ohio‐based maker of glass containers. Owens‐Illinois has cut receivables and payables overhead costs in half during the last eight years by


automating many of its processes in those areas and consolidating activities in a financial shared services center. Consolidation was possible despite the fact that the company was absorbing a major acquisition that helped drive its revenues from $5.8 billion in 2002 to $7.1 billion in 2009.

“This is a trend we’ve been seeing, and one that we are in the middle of pursuing,” notes Rick Noble, staff vice president of corporate cash management for Wellpoint. To improve transparency, his company has consolidated what had been a diverse collection of billing and payment systems across the country, many of which it had taken on as the result of acquisitions. Meanwhile, it also has been pushing its vendors to invoice electronically and to accept payments via the Automated Clearing House (ACH) network for electronic financial transactions.

In the receivables area, Wellpoint has implemented an online billing system for its group‐plan customers that lets them review, modify, and pay invoices electronically. “We’re working with customers to do more online invoicing through e‐mails, with links to online payment systems,” Noble explains. “All of this is improving our cash flows and speeding transactions, and giving us better visibility into our collections and spend, which allows managers to make better‐informed decisions.”

EarlyWarning Dashboard AES Corp, based in Virginia, is a $14.1 billion independent power producer with nearly 75 percent of its generating capacity under long‐term contract with distributors. Historically, the company focused more on streamlining its AP processes than on tightening its revenue collection cycle and whittling down its days sales outstanding. This was, in part, because it tends to have relatively few, but very large, customers. “The revenue collection cycle was much more of a relationship management kind of thing than it was a true collection cycle practice,” concedes AES Executive Vice President and CFO Victoria Harker. When the credit crisis hit in 2008, that changed.

“Organizations everywhere were trying to string out their payables to manage their cash flows,” Harker recalls. Fortunately, AES had good access to receivables data in its ERP system. The company quickly began leveraging that data to track DSO by region and business on a monthly basis, Harker says, and to take a more proactive approach to shortening its order‐to‐cash cycle. Among other things, finance created an early‐warning dashboard that could alert the company’s five regional CFOs scattered across the globe, on a daily basis, to past‐due accounts so that they could dispatch personnel to resolve the problem. Over the course of 2009, Harker says, the company was able to reduce its days sales outstanding by about 17 days, to approximately 47 days, paring working capital by about $180 million in the process. “I don’t expect to see an ongoing 17‐day‐a‐year kind of improvement,” she says, “but I do think this effort has caused our people to be more observant and focused if they see a business or region starting to show some softening. People are going after those situations much more quickly now.”

Prioritizing AR Activities “I think the credit crisis of 2008 taught us that some of our internal processes weren’t as predictive as they need to be,” notes David Barta, VP and CFO of Regal Beloit, a $1.8 billion Wisconsin‐based maker of mechanical motion control and power generation products. Becoming proactive since then, Regal Beloit is implementing an advanced collections module for the company’s ERP system to help collections personnel prioritize their activities automatically. “In the past, our collections people’s daily work activity was predicated either on a calendar—it’s Tuesday, so it’s time to call Customer X—or by


scanning through a list of receivables to decide who they should call,” Barta says. “This advanced collection module will help prioritize their work by metrics we define, such as time or disputed balances. When our people come to work and turn on their computer, a to‐do list will pop up on the screen for that day. Their day will be set, and they won’t be wasting time figuring out who they should call.”

Learning to Leverage the Balance Sheet “When the recession struck, we went into a strategic mode,” observes Owens‐Illinois’ White. “We were able to selectively protect or assist our more valuable customers and vendors (with favorable terms) because we thought there was a long‐term return there.”

For suppliers, a strong financial position based in part on collaborative working capital management practices can help retain customers, especially when the economy turns south. During the recent credit crisis, for example, many companies began to wonder whether their vendors had sufficient financial strength, stability, and liquidity to support them. Vendors that could demonstrate a cash‐rich balance sheet and a record of timely payment to their own suppliers operated at an advantage over those who could not.

Conversely, companies with strong balance sheets discovered that they could leverage their own financial strength to help important vendors and customers that might have been struggling financially. Wellpoint actually made loans to some of the hospitals in its insurance networks. Owens‐Illinois helped customers in selective instances, too.

MEMC was in a similar position. “Because we had a strong balance sheet, we spent a great deal of time trying to take good care of our customers,” says MEMC’s Oliver. “We used the difficult environment to recapture some market share and prove, with our pricing and terms, how customer friendly and focused we were.”

Perhaps most importantly, companies with strong, visible cash flows have more flexibility than their weaker and less nimble counterparts. Consider Arrow Electronics Inc., a $14.7 billion distributor of electronic components and computer products headquartered in Melville, New York. Paul Reilly, the company’s executive vice president of finance and operations and CFO, notes that because his company did so well conserving cash through the credit crisis and freeing cash from working capital, it can be more aggressive investing for growth now that the economy is rebounding. “We have a renewed focus on investing our cash both for organic growth as well as growth through acquisitions,” he says.

Owens‐Illinois is in a similar position. “You’re going to see expansion from us, either in building greenfield furnaces or plants or in making acquisitions,” White says. “A strong balance sheet allows you that flexibility. With good working capital management, we’ve freed up cash to grow the company instead of just maintaining what we have.”

In fact, White notes, the working capital culture has taken such deep root in the Owens‐Illinois culture that due diligence teams going out to evaluate potential acquisition targets are now factoring it into their analysis. “They not only come back saying, ‘We think we could run the factory better,’ but, ‘We think there are $5 million to $10 million of synergies in working capital,’” White says. “The fact that they are now viewing working capital as an opportunity for synergy as they benchmark companies we’re looking to acquire is very encouraging.”


Instilling Working Capital Discipline It’s clear from this research that CFOs took advantage of the economic downturn to campaign on behalf of stronger working capital management. “If there is a benefit to all that we’ve been through, it is that we had a great opportunity to educate and communicate to the organization the value of working capital discipline,” says Mark Buthman, senior vice president and CFO of Texas‐based Kimberly‐Clark Corp., the $19.1 billion maker of HUGGIES® disposable diapers, Scott® paper towels and tissues, and other household products. “We spent a great deal of time during the credit crisis explaining to our teams that if we’re able to generate cash, we will reinvest it to grow the business. And that’s a pretty good story.”

Buthman also points out the value of connecting the dots between cash efficiency and operating efficiency. “One of the insights we gained from the financial crisis was that when you tighten up on working capital, a lot of other good things happen,” he explains. “As you reduce receivables outstanding, for example, your customer financial services team spends less time chasing down errors and more time doing value‐added work. As you reduce inventory, you stop shipping between warehouses. Disciplined working capital management forces you into making more informed decisions. We’ve learned that if we can do this as well as or better than other companies, we’ll not only have more cash, we’ll also be more efficient.”

Another take on this comes from Arrow Electronics’ Paul Reilly: “We’ve learned some good discipline over the last two years, and we don’t want to walk away from that.”

A Final Word: Doing Nothing Is Costly The demand for better working capital performance will only grow. “Our goal is to generate as much cash as we can to grow the business and to give us options to invest in opportunities that come along,” says Kimberly‐Clark’s Buthman.

Meanwhile, leaders in the field show no signs of letting up. At Owens‐Illinois, for example, White professes no appetite for coasting. “Because we’ve already improved a lot, it’s easy for people to say we can’t get any better,” White says. “But we continue to do a lot of benchmarking, and we continue to encourage outsiders to come in and kick our tires because we know there’s always the chance we will learn something. We want to make sure we stay current and on top of things. Don’t rest on your laurels is, I guess, what I’m saying. And we haven’t done that.”

Indeed, this latest research confirms that a growing number of CFOs hope to emulate the pioneers. They are simply no longer willing to tolerate sub‐optimal processes and the costs they impose.


RESEARCH SPONSOR’S PERSPECTIVE As this APQC report illustrates, CFOs and other corporate finance executives are emphasizing sustainable improvements in working capital to maintain financial health across business cycles. Historically, working capital objectives have focused on better management of inventory or the acceleration of accounts receivable. The ability of accounts payable to impact working capital has been largely ignored.

The economic downturn has caused corporate finance professionals to expand their scope and explore opportunities within accounts payable to optimize working capital without contributing to trading partner tension. In the traditional approach, buyers focus on maintaining or extending Days Payable Outstanding (DPO) and increasing cash returns from float. In return, suppliers often face a delay in receivables and cash flow pressure. This results in tying up valuable working capital in the payables process.

Today, the business commerce network makes possible a collaborative approach to managing cash that serves the needs of buyers and their suppliers. The findings in this APQC report show that CFOs are embracing this strategy. With collaborative finance management, buying organizations can maintain or extend DPO; optimize cash use; and realize high‐yield, risk‐free returns on their payables without increasing supply chain risk. Collaborative finance management offers suppliers visibility and control over their receivables to better manage their cash flow and to take advantage of new liquidity options such as receivables financing and dynamic discounting that don’t exist in the paper payables world.

Ariba is on the forefront of this new era for managing cash with its recently launched Ariba Commerce Cloud strategy for enabling efficient and effective commerce between trading partners. The Ariba Commerce Cloud gives companies everything they need for agile business commerce, including:

• comprehensive working capital management solutions that feature early‐payment discount management, supply chain finance, and receivables financing through a partnership with The Receivables Exchange, and p‐card settlement in partnership with third‐party financial institutions;

• on‐demand technology to optimize the complete commerce life cycle–from source‐to‐settle and market‐to‐receipt;

• a Web‐based community to efficiently discover, connect, and collaborate with a global network of trading partners; and

• capabilities to augment internal resources and skills with always‐on expertise and commerce services.

Results from this APQC report validate Ariba’s new positioning and its positive contribution to working capital management for buyers and suppliers. A large number of survey respondents are emphasizing a reduction in working capital requirements, more reliable forecasts of cash inflows and outflows, and a disciplined approach to discount optimization. Along with that, the majority of respondents are broadly supporting the deployment of innovative technology solutions to reduce the amount of paper in AP and AR.

Innovative technology for enabling efficient and effective business commerce is a key component of the Ariba Commerce Cloud. An example is Ariba’s “smart invoicing” approach to electronic invoicing, which allows a firm to eliminate invoice exceptions at the point of supplier submission and ensures that


invoices comply with essential VAT and related cross‐border indirect tax regulations. With a smart invoicing approach, organizations can achieve virtually 100 percent touchless invoice processing, meet on‐time payment performance objectives, enforce preferred vendor selections, and capture all pre‐negotiated discounts.

Ariba customers are leveraging the business commerce network to achieve financial performance breakthroughs. For example, a leading sports equipment retailer has reduced its invoice approval cycle from 21 to five days, increasing the capture of existing discount terms from 35 percent to 90 percent, and achieving discounts on 4 percent of targeted spend. A Fortune 100 global energy company is moving toward 100 percent touchless invoice processing. A global equipment manufacturer is processing 90 percent of its global spend through the Ariba Commerce Cloud, reducing its AP head count by 75 percent. A medical distributor is leveraging receivables financing through the Ariba Commerce Cloud, which has helped the company negotiate more favorable payment terms with its suppliers in China.

These are just a few examples of collaborative finance management that is unleashing working capital benefits to both buyers and their suppliers.

If you are among those corporate finance organizations looking to expand your working capital vision to encompass collaborative finance management, building the business case is a good place to start. For assistance, you can leverage the business commerce experts at Ariba to help develop the ROI. Feel free to contact us at 866‐772‐7422 or via e‐mail at [email protected]. Or to learn more about the impact to financial performance of a business commerce network, visit our Web site at http://www.ariba.com/solutions/manage‐cash.cfm.

Sincerely, Peter Lugli Senior Director, Working Capital Management and Business Development Ariba, Inc. [email protected]

working capital management - treasury &...

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