EBITDA versus Operating Cash Flow
A vast majority of organizations are focused – and incentivized – entirely by EBITDA. This usually means working to increase revenue or reduce costs, while maintaining service levels.
EBITDA is only a single indicator. To develop a full picture of the health of any given firm, a number of measures must be taken into consideration. Many organizations are failing to realize greater financial outcomes that can be achieved by leveraging working capital improvements. While the benefits from reduced cost usually take a year or more to deliver, working capital gains can be achieved almost immediately and with relatively little effort.
On the supplier side, the most obvious method of improving working capital is to increase payment terms so that cash remains in the business for longer. Here, the benefit can be realized almost as soon as the next invoices are processed. Instead of paying suppliers after 30 days, they are paid after 60 days, creating immediate and significant improvements to cash flow.
On the customer side, the most obvious method of improving working capital is to ensure invoices are being paid duly. Here, the benefit is almost immediate, unpaid invoices will be converted in cash faster.
In both contexts, the critical success factors rely on the global adherence of key activities and their sustainability.
Algeco: a case in action
Algeco is a leading global business service provider focused on modular workspace, secure storage solutions and accommodation management. It operates across all continents with annual revenue around $1.1bn.
Algeco delivers for its customers – ‘wherever, whatever and whenever the need’ and has a thriving service culture that is available, adaptable and reliable. It services the needs of 37,000 customers globally, with particular expertise in public administration, construction, energy/natural resources and industry and services.
However, internally Algeco recognized that it needed to generate overall company awareness around working capital – not just within the finance functions but throughout the organization. For example, its thriving sales organization was well-focused on new business but didn’t have any responsibility for cash inflow from existing contracts.
Collection activities and processes varied substantially from country-to-country and were largely unstructured. In some countries, overdues represented 50% of Accounts Receivable. A clear dispute management program was not in place, and the days outstanding (DSO) for country in scope was at 63 days at the start of the project.
Key objectives were to reduce the number of days outstanding by 15% and increase cash awareness across the organization.
Together with Algeco, we outlined five parallel initiatives:
- Establish an approach to rapidly address top overdues to generate cash – ‘dash for cash’
- Implement a dispute management program throughout the entire organization, with buy-in from all relevant stakeholders: Sales, Operations and Finance
- Restructure the collection process
- Optimize invoicing and unbilled management
- Roll out a group-wide, standardized monthly working capital reporting process
INDUSTRY 4.0, 101 ... WHAT ARE THE BASICS?
Industry 4.0, also known as the Fourth Industrial Revolution, is based around four core principles:
- Interconnection – The ability for technology and humans to connect and communicate effectively via the Internet of Things (“IoT”)
- Information transparency – Providing operators with comprehensive information to make decisions and share data and information from all points in the process
- Technical assistance – The capacity to assist humans in decision-making and problem-solving, especially with complex or unsafe tasks
- Decentralised decisions – The capability of technology to make independent decisions and conduct autonomous tasks with little human interference
When applied well, there is real opportunity for the innovation of Industry 4.0 to drive step-change improvements to supply chains and influence the changing role of supply chain and procurement teams.
Industry 4.0 can have different implications depending on the industry and consists of several components, including additive manufacturing, cyber-physical systems, IoT, on-demand availability of computer resources, and cognitive computing. Benefits of Industry 4.0 include:
- Enhanced supply chain resilience through the various elements within the industry 4.0 “ecosystem”, including additive manufacturing and blockchain-based track and trace systems
- Improved business continuity through advanced maintenance and monitoring
- Enhanced quality of products through IoT-enabled improvement
- Enhanced productivity through optimisation and automation
- Improved time management by collecting real-time data for a real-time supply chain
HOW IMPORTANT IS WORKING CAPITAL?
Businesses that prioritise working capital realise that it is actually the cheapest means of accessing finance, removing or reducing the need for expensive bank finance, equity dilution or issuing shares. It can also lead to a greater impact than classical procurement savings, which has a more immediate effect on the business.
In some cases, it’s possible to improve the balance sheet by as much as 20% percent, depending on the size of the business, which can prove extremely attractive to potential buyers or private equity owners.
Finally, there are the additional gains that come from having a more streamlined and harmonious organisation; one in which procurement, supply chain and finance work together – not only on working capital and payables, but throughout the organisation.
This leads to more efficient and congenial working relationships throughout the business and the potential for further initiatives to drive value, reduce cost and ultimately create a more sustainable and profitable organisation.Printable PDF