Financial performance forms the backbone of contemporary business, ensuring organizations remain resilient, profitable, and prepared for growth. Central to achieving this is working capital—a critical financial metric that reflects an organization's ability to meet short-term obligations while driving long-term success.
In this blog, I’ll dive deeper into the essential role of working capital in achieving financial control, explore strategies to optimize it, and share how my perspective on Integrated Value Planning can help align financial goals with business performance.
Or should I say, the Triangle of Cash, Cost & Service?
Working capital, calculated as the difference between current assets and liabilities, represents the financial resources available for day-to-day operations. Proper management of this capital ensures businesses can meet immediate financial needs while staying agile for growth opportunities.
In the realm of enterprise planning, working capital is indispensable. It underpins activities such as purchasing inventory, settling supplier invoices, and addressing short-term commitments efficiently. That’s why it’s crucial to keep it under control at all times and make sure it stays under control, even when internal and external influences might make this difficult to maintain.
To succeed in this, I’ve been developing the concept of the Supply Chain Triangle for several years. In its essence, it states that a company’s service, cost and cash should be balanced if you want your business to be, and remain, healthy. Consider, for instance, a company that wants to cut costs by offshoring some of its services. As a result, the service quality might drop and transport risks might rise, which would in turn impact working capital and the supply chain as a whole. That’s why the triangle is a useful reminder that every side is connected and you need the support of all departments to maintain this careful balancing act.
In our current day and age, balancing the triangle is becoming more difficult as our business environment is becoming more and more complex. It's no longer just about balancing service, cost and cash. We increasingly need to meet environmental objectives, like reducing C02 emissions, and social objectives, such as more responsible sourcing.
A new vision on the integration of planning processes can help to solve some of the common challenges I have seen over the last 15 years and some of the same challenges I still see today. I’ll mention the three most common struggles, being the
I dedicated a whole blog on this vision if you’re eager to learn more.
On top of these specific planning issues, there’s the challenge of increased market volatility, which won’t be going anywhere soon. To deal with this, we cry out for more flexibility. But this is exactly what company’s around the world are struggling with: adapting their decades’ old processes to the new, volatile, global markets expectations. So how can you fix this in terms of working capital?
There are quite a few ways you can tackle the performance of your working capital, such as purely technical or financial solutions (e.g. bank financing to help meet supplier and/or customer demands). However, as interest rates are rising and financing gets more expensive, it might be useful to consider a more operational approach to working capital performance – even if you have an AA or AAA financial rating.
One approach to optimize the performance of your working capital is to thoroughly, and frequently, review your product or service portfolio. Which parts of your portfolio add value, which detract value, and how can you resolve these issues through clear insights and meaningful actions?
At Solventure, we have taken up this challenge and developed the platform Solventure Perform with the aim to support manufacturing companies with their corporate performance. By zooming in on the product portfolio management approach within CPM (Corporate Peformance Management), our goal is to not solely improve the overall health of a company’s product portfolio, but also improve their internal management discussions with a clearly aligned agenda, follow-up actions and a supporting tool. With these insights, our customers optimize their business performance meetings by including committed and proposed portfolio actions, discussions on KPI evolution, process improvements and much more.
Of course, inventory is not the only determining factor of working capital. You also want insights into your receivables, payables and payment terms, for instance. What margin do I make on which customers, and which payment terms are in play? Are we paying our suppliers too soon, or are our customers not paying fast enough?
With an overview of the current state of these working capital factors, you can get to work on streamlining them. And in the end, our team of Solventure professionals can help you set up a recurrent workflow to review the value-driven data coming from Solventure Perform, determine working capital actions based on these insights, and make these actions into reality by engaging every stakeholder involved.