Digital transformation of your Order-to-Cash process: Part 1 – Working Capital in the spotlight

Why transforming the entire Order-to-Cash process through an integrated digital platform has become compelling for businesses

Author: Evelyne Legaux, Finance OTC Consulting Ltd 

Part 1 – Working Capital in the spotlight

One thing that the Covid-19 pandemic crisis achieved in just a few months was to highlight the need for companies to improve their working capital & cash conversion cycle (CCC) management. In particular, both the criticality & complexity of the end-to-end order to cash (O2C) process has been brought to the fore and rightly placed under the spotlight!

For much too long, companies have been focusing on their revenue & bottom line performance while downplaying the importance of a healthy balance sheet. Even when working capital started to rank higher on the agenda of finance leaders over the past few years prior to the pandemic, the trends observed revealed that companies were mostly “playing” with contractual or actual vendor terms to improve their cash flow as opposed to developing a proper working capital management (WCM) strategy.

The Covid-19 crisis has prompted companies to react fast by taking easy-win emergency measures to protect cash & improve cash flow forecasting – however, this will not be sustainable in the long run.

So, why is it that most companies fail to address or keep overlooking Working Capital Management?

Because the cross-functional nature of WCM is challenging & leadership teams fail to support it holistically. This is being amplified by new demands put on people such as social distancing & remote working.

According to a survey recently conducted by Deloitte UK, looking back at the 2008 financial crisis indicates that UK-listed companies saw a dramatic 25% rise in their CCC up to 50 days and took two years to recover down to pre-crisis levels (40 days). Due to a subsequent focus to drive resource consuming process improvements & cash awareness across their respective organizations, those same companies managed to achieve an impressive further reduction in CCC down to 25 days by 2015, meaning less than one month’s revenue was tied up in working capital!

Breaking down CCC into its three elements shows informative trends over the past 10 years: while DPO continuously improved, rising by 50%, DIO steadily drifted towards its 2009 post financial crash levels & DSO remained relatively stable over that period of time.

However, such improvement in CCC failed to be sustainable and a return to a 50-day CCC is likely in 2020 as a direct consequence of Covid-19… which has led most companies to understand that having a proper WCM strategy in place supported by an effective governance structure & digital tools using AI has now become crucial to responding faster & surviving not only this crisis but subsequent ones!

Author: Evelyne Legaux, Finance OTC Consulting Ltd 

Continue for Part 2.