Cash in the polycrisis: The growing case for working capital optimization

Co-authored with Duncan Lau

“Revenue is vanity, profit is sanity, but cash is king.” - Unknown

Today, companies across all sectors are facing an upswell of economic hurdles and operational speedbumps stemming from competing crises – aka the “polycrisis.” In an environment that aggregates the impacts of a pandemic, geopolitical conflicts, accelerated climate change, social unrest, and other global issues it’s critical for organizations to optimize their working capital in the name of freeing up cash to protect their businesses, fund new initiatives, and generate value in the short-, mid-, and long-term.

In this article we’ll dive into cash and working capital optimization (WCO): what it is, how it can benefit your organization, why it’s an often missed opportunity, and what steps you can take to leverage WCO for your business.

Unlocking trapped cash

Cash and working capital are the lifeblood that companies need to run their business and maintain operations. At a high level working capital is the difference between a company's current assets (cash, inventory and accounts receivable) and current liabilities (accounts payable). As part of day-to-day operations, companies invest and build working capital.

Working capital optimization (WCO) is the process of strategically and effectively managing these areas to maintain a proper amount of working capital to operate the business, while, converting any surplus capital to cash.

The process of WCO can help:

• Release surplus cash to fund operations, performance improvement, capital expenditures, investment, and other business activities.
• Reduce the need for debt, enabling companies to redirect more money into their operations rather than covering increasing interest rates and loan repayments.
• Gain a stronger line of sight into an organization’s liquidity to support strategic decisions.
• Increase the return on capital with customers and supplier relationships.
• Enhance enterprise value; In the mid-term, WCO can be paired with other initiatives such as Rapid Performance Improvement (RPI) to increase the company's overall enterprise value.
• Enable transformation; In the long-term, WCO is one of the key levers to unlock hidden or new value for a business as part of a transformational project.

 WCO in action

Depending on your company’s unique circumstances WCO can offer different benefits. Let’s take a look at a few examples.

One organization our team worked with was cash poor, yet carrying a significant amount of inventory. In this case, the WCO solution was to create an inventory reduction plan that enabled them to convert slow moving inventory to cash. As a result, the company was able to increase its liquidity and move into a healthier financial position.

In another instance, a company had an accounts receivable (AR) that was aging out and the carrying cost of the AR balance eroded cutomer profitability. Here, the WCO response was to integrate AR metrics into the customer scorecard, and in doing so customer payment terms became just as important as customer pricing. Business unit leaders began negotiating better terms and AR payments moved from 95 days to 45 days.

In both these cases, the organizations were able achieve a cash windfall, which can be reinvested in the business to fund growth. In the cases of distressed organizations, WCO is even more important, as the release of any excess cash can offer a lifeline by extending the liquidity runway.

Capitalizing on WCO is becoming more common as the aforementioned polycrisis and economic challenges send more companies searching for ways to relieve financial pressures. WCO is unique by the fact that it can help companies generate cash without increasing sales or cutting expenses.

Opening the hood

Despite the obvious advantages of WCO, we’ve found that Canadian companies aren’t as attuned to this practice as their global peers. Recognizing this, our team has developed a unique WCO diagnostic approach and framework that enables us to guide clients through a working capital enhancement exercise that gets results quickly.

WCO begins with an understanding that every company is unique. As such, conducting an analysis to understand a company’s situation and what is within the realm of possibility is an essential first step in the process.

Here is where KPMG in Canada can help. Through our industry-tested WCO methodology, we conduct data-driven diagnostics, supported by industry specific proprietary analytical tools and benchmarks, that provide clients with an in-depth profile of their working capital. From there, we continue collecting WCO-related data, review and develop a cash forecast, and hone in on the best WCO opportunities based on the organization's goals, realities, and short- and long-term priorities.

Interested in learning more?

Reach out to myself or Duncan Lau for any questions about WCO for stressed or distressed organizations; to Bruno Atristain for inquiries about leveraging WCO to maximize the value of your business pre-sale; and to Alison Glober for insights on larger transformation initiatives to build value in the mid to longer term.

Remember: WCO represents one of many business value creation levers. For insights on other areas of consideration for creating and preserving value, check out KPMG in Canada’s “7 Levers to Business Value Creation” guide and stay tuned for more cost optimization and value creation content from our colleagues at KPMG Canada .