Why CFO's keep Working Capital Optimization on top of the agenda
Co-founders and the small C-Suite team including of course the CFO at startups, as much as key business leaders and entrepreneurs, are a worried lot today. There’s, of course, the on-going volatility in the global stock markets adding to the overall gloom and negative business sentiment, but what’s been troubling them most has possibly been about wary investors increasingly shying away from early stage startups, while even some of the bigger names in the startup entrepreneurial ecosystem are beginning to feel the pressure of raising money.
This changes nothing for the entrepreneur and his CFO, which many a time is the same individual in a startup. The challenge is that when the funding stops, it will affect hiring, talent acquisition, technology upgrades et al.
While there could be multitudes of challenges in the business model, the most crucial for the majority is the perpetual dearth of resources and the constant struggle to balance these to get the maximum at that point of time. To stretch each resource for that one extra day is what epitomizes an entrepreneur’s life!
As expected, the most important of these resources is cash flow, the lifeblood of running an organization. And ensuring that the flow is uninterrupted is the job of the CFO. Every CFO wants to see his organization well capitalized and hence Working Capital Optimization (WCO) is a top item on the agenda for any CFO.
WCO is all about optimizing trapped cash in all the three areas: Payables, Inventory, and Receivables. As most of the startups have been in the services space, payables and receivables are the two big factors for WCO.
Most of the CFOs use payables a very effective WCO tool. Technology has aided the process improvements in a big way with the availability of world class payables systems. However, technology is as good as the implementation and there still exists issues with mismatched timelines, duplication of vendors, and different terms for the same vendors etc. However, with startups now focusing on hiring top talents from the market in all fields and with technology being the game changer in most startups, this would not be a significant issue.
Most CFOs would always look to extend the payables to maximize the free cash, but from a business point of view, that might not be a good strategy always. What is required is a good strategic approach to payables to ensure a great mix of higher payables days yet has a great buyer reputation.
Getting good terms from reliable suppliers is always a challenge, more so for a start-up. Being wary, most of the suppliers to a start-up prefer faster payment terms and/or lower credit. Supplier portals with clear & transparent workflows provide the great strategic tool to build a good reputation with suppliers.
Building a robust procurement process with clearly defined approval matrix is always a good start to building a good payables system. Evaluating and creating a preferred supplier list with clear & standard payment terms, robust invoice capture process, fixed monthly days for payments, clearly drawn timelines for internal approvals etc. are some of the practices which lead to a system which support the WCO efforts.
Receivables are one of the most significant and yet most underrated parts of WCO for a start-up. Due to the constant struggle for growth and to capture market share, most of the time payment beyond due dates is taken as part of the business operations which might not be the case actually.
CFOs usually grapple with this aspect of WCO on a daily basis with almost negligible control on the levers to control or manage it. In recent times, there have been some assertions from the CFOs office on the way forward and planning on this front. Management of receivables is a science in itself and many segments of the industry have developed robust and terrific processes and systems.
For startups, the option to set up a separate AR team is not a feasible option. Hence the key account manager, or the sales person, is required to collect the AR on time. Mostly, the variable payout is linked to timely collections. However, looking at the operational efforts required to ensure collections, many a time, the sales person begins slipping up leading to delayed payments.
And quite often, the collection call is combined with the new business calls leading to ideologue clash. Underwriting a customer for credit also is a function of inputs from the sales team and this has an inherent conflict of interest built into it.
Organizations have realized the importance of separating credit from sales and have started doing it. The key is to have a small team (outsourcing is an option) which focuses on collecting receivables on time. Clearly laid down the process to capture the purchase orders correctly to avoid disputes/corrections at a later stage is important.
Standard templates for invoicing with clear details on the products/services sold help to smoothen processing at the buyer’s side. Ensuring right invoicing and attaching relevant documents the first time is the key to faster realization. Providing incentives for faster payment is a good strategy and should be used often. A robust credit process and the focused team is the key for faster collections leading to cash flows.
Effectively using the banks for faster realization of cash can also be explored. Bill discounting, factoring etc are a few option which if used effectively can lead to faster cash flow but at a cost. Another alternative is to completely outsource the collections process.
There are organizations today who have forayed into this niche space offering solutions which can significantly free up resources to be deployed to more productive work within the organization. CFOs should look at firms which can own up the complete collections delivery and work seamlessly within the organization adding value. As the outsourced firm represents the organization, due diligence in terms of the quality of people employed, processes being followed and most importantly the ethical and compliance framework should be evaluated thoroughly before finalizing.
Today a CFOs work does not stop with finance. In fact, it begins with it. The requirement now is to be a complete business manager and not simply a bean counter. CFOs have realized this and are embracing the new requirement, adding significant value to the organization. They are truly the “complete managers” of today. If there is one setup which provides this opportunity for a CFO to go beyond and look at the business in a holistic way, it is a Startup!