Lessons on working capital: interview with expert Elena Bail

In our ongoing series, we are tackling the topic of working capital management from different perspectives. Today, I am chatting with Elena Bail who I have worked closely with for several years. She is a Senior Manager at EY with more than 20 years of experience in working capital management.  

Elena started her career in Insurance and Financial Services, then moved into the responsibility of global project manager at a large industrial company before joining the dedicated Working Capital expert team of EY in 2008. Alongside consulting, she is both a member of the working capital expert group of the International Controller Association and a known publisher, speaker, and lecturer on sustainable working capital management.  

Philipp: What are your lessons learned from the crisis with regards to working capital management?  

Elena: I think this year has shown, more than ever, that VUCA and disruptive events and the use of advanced technologies will be the “new normal”. Businesses require an agile organization with harmonized processes in order to react quickly to unforeseen events and market developments.  

Actively managing cash and capital consumed in the three big company end-to-end processes of Purchase-to-Pay (Accounts Payable), Forecast-to-Fulfill (Inventory) and Order-to-Cash (Accounts Receivable) and gaining a fast cash conversion in these is a core task. As effective working capital management aims at securing a company’s financial strength and to stay independent from e.g. banks or investors, it is a key pillar in surviving the crisis and emerge. But even more important is that working capital management also provides the urgently required insights and reaction agility. State-of-the-art working capital management utilizes the analytics needed for decision making, provides operational deep-dive analytics for detailed and impactful action planning and harmonizes processes that action plans can be roll-out at accelerated speed.

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Philipp: What makes effective working capital management so important in the current situation?

Elena: Working capital is like a hidden treasure that just needs to be raised. It refers to capital which is already available in the company, bound in the mentioned processes. These processes need to be optimized to release this capital or - in case of growth - make smarter use of the capital invested by servicing higher revenue at the same capital level.

There are so many possibilities to optimize your working capital - and quite a view can be tackled through just internal measures only. This means you do not even need to address your customers or suppliers (which can be quite challenging), but simply change your own way of working. From my experience, businesses can gain cash release effects of 5-7% of revenue usually, with 50% realized within the first year.      

Philipp: What are the specific challenges in working capital optimization projects, and why do so many companies have difficulties sustaining the effects of former improvement initiatives?  

Elena: Well, sometimes it just requires some pragmatism in the short-term, e.g. by just picking up the phone and calling your due accounts asking when you can expect payment. But this will work only once or twice and causes high manual workload on valuable resources. However, in order to sustainably optimize working capital you need to change established processes, awareness and targets. In 99.9% of the cases you will need changes to your tools and systems and often touch upon people and culture. Most likely, you will also stumble across competing cost targets which need to be aligned in order to reach balanced priorities. Finally, due to their mixed and often mid- to long-term character, it is quite hard to make benefits and effects of working capital improvements transparent to everyone.

Consequently, many people participating in the relevant processes consider working capital as an overall mystical “strategic something” but do not see the relevance for their daily work, meaning they often simply do not understand their own impact on working capital.

Philipp: Everybody talks about digitalization. What does digitalization in a working capital context look like?  

Elena: Transparency is key. What cannot be measured, cannot be improved. Companies need to get more efficient supported by state-of-the-art tools and technologies. Value-adding working capital analytics is based on transactional data and therefore provides a highly exciting level of detail. Transactional means every invoice received, every invoice sent and every type of inventory moved. This data basis should be made use of and followed-through the entire process-lifecycle across the organization. By doing so, you can create insights based on historical data, evaluate the financial impact of single actions and predict and simulate future developments and outcomes.

A company leader needs to make use of all this data. Create a strategic view and break it down into crispy, operational tasks for everyone along the process. It’s all about making it part of your and your people’s daily business instead of a cumbersome year-end closing activity. To put it short: You need to enable continuous improvements on daily practices.

Philipp: What about skills? Do you think companies have the right skills & resources available to optimize working capital effectively?

Elena: When talking about technologies, today there are numerous great BI tools available on the market to handle and to visualize large amounts of transactional data. Compared to some of the classical, rather painful analytics tools from some years ago they are all “rockets”. Utilize them to a maximum. If you haven’t started yet, you got to start doing it now!  

From a skills & knowledge perspective, dedicated working capital experts with full end-to-end process knowledge are quite rare. An option can be to hire consultants as conceptualizers as well as running a “first wave” or “pilot” implementation as a kick-starter. They will share their expertise and train your staff, so knowledge stays in the organization, for example by establishing “Working Capital Champions”, or alternatively define one dedicated specialist in a central position. Often, however, businesses are left alone with nice looking concepts in power points but are not able to implement it due to lacking capabilities and resources. Result is, working capital improvement initiatives sand up and your staff gets frustrated about consultants. Therefore, while making working capital management a daily routine, you got to start tracking progress of implementation and adherence to process supported by meaningful KPIs.  

Philipp: That is exactly what we at aioneers also experienced, and that’s why we have developed our AIO platform in order to answer the questions: ‘What is actually going on in my supply chain? How can I improve it?’ And more importantly: ‘How do I ensure successful execution?’  

As we are still stuck in the pandemic crisis what would you recommend CFOs/Controllers to do next?  

Elena: Every business has working capital independent of size or sector, thus everybody can optimize it. In times of emergency and firefighting, you should put your focus on your burning topics with pragmatic measures that bring quick effects. But only establishing a stable and sustainable working capital management will train and take root for a culture of consistent cash and capital improvements throughout your entire organization - KPI-based, operationally driven, ready to evolve fast and highly agile.