Return of the King: Increasing the
Cash Flow with Working Capital
Management
by Kurt Weber, Managing Director, Aura Cadis, Managing Consultant and Aniko Somodi, Managing Consultant
– Horváth & Partners Management Consultants
Working Capital Management, an important source for liquidity, is becoming increasingly important for Romanian
companies. A new Horvath & Partners benchmarking study (143 completed questionnaires and financial data of
300 companies) on Working Capital Management shows that Romanian companies still have a huge potential
in improving receivables collection, stock management and management of payables.
Working capital management has become an important
tool for many companies – the trend is upward
In the context of the global financial crisis,
the importance will...
Working Capital Management is becoming increasingly
important for companies in Romania, 57% of the respondents (82
companies) consider it highly important in the current economic
situation. For the future, 75% of companies expect the relevance of
Working Capital Management to grow.
80
60
40
20
Romanian companies have realized that an effective working
capital management will deliver multiple benefits, by identifying
internal sources of liquidity and optimizing internal processes with
positive effects on results.
Working Capital Management importance
Present importance of Working Capital Management
0
Grow significantly
Grow
Remain unchanged
N=143
In the future, the importance will...
100
90
80
70
60
50
40
30
20
10
0
N=143
50
0
Grow
Very important
Important
Less important
Remain constant
Decline
Unimportant
N=143
Romanian Business Climate
77
Receivables management are considered to have the greatest optimization potential
1/3 of the companies apply a wide range of instruments in
Receivables Management
27% of the respondents believe that the greatest working capital
improvement potential is in receivables management, as many
companies are heavily exposed to outstanding payments from clients.
Almost half of the companies in the survey have specific
monitoring procedures and reports, credit limits and defined
dunning procedures in place. Less common instruments in
Romanian companies (30%) are defined claims handling procedures,
differentiated payment terms, standardized credit terms and access
to external creditworthiness information.
Management of payables is of no less importance for companies
in Romania, supplier base consolidation and contract terms
renegotiation thus have equally great potential to optimize the
working capital of the company.
Less than 50% of the companies have achieved
significant working capital improvements
More than 50% of the survey participants have started improving
their Sales and Planning processes. Only 40% have made efforts to
reduce Order Processing and Production lead times. Less than 25%
have started to optimize their Warehousing structures and to reduce
product assortment and complexity.
Increasing
days payables
outstanding
Increasing
stockturnover
Prices renegotiation and payments rescheduling are the
most commonly used approaches in Payables Management
Reducing
days sales
outstanding
0%
Very much
20%
Much
Small
40%
60%
Very small
80%
Not at all
100%
Not implemented
N=143
Although optimization measures have been taken by most
companies, it seems that the measures did not have a significant
impact on the optimization of the working capital.
A possible explanation for the modest achievements could lie in
the fact that only approximately 1/3 of the companies have provided
specific trainings to their employees on Working Capital Management,
and only 42% of the companies have clear descriptions of processes
in receivables, stock and payables management.
Degree of application of Working Capital Management
Trainings
Process
description
Incentive
and reward
system
Reporting
system
Clear defined
responsibility
0%
Functional
20%
40%
Approved concept, to
be implemented soon
60%
Under development
80%
100%
Responsibilities for Working Capital components are not
sufficiently clarified and aligned
In most of the companies the Financial Department is responsible
for claims handling and invoice collection, while Procurement
and Production are responsible for materials and finished goods
management respectively.
It is, however, strange that Financial Departments are responsible
for claims handling and receivables collection yet another
department has negotiated the contracts and terms of sales. As in
most companies the Financial Departments do not perform risk
evaluations of suppliers or approve creditworthiness of clients,
Financial Department are thus responsible for something they
cannot control.
Romanian Business Climate
More than 50% of the participants have renegotiated prices
with suppliers or have rescheduled payments for trade sale debts.
Less popular instruments are discounts for early payments (45%),
extension of payment terms (30%) or barter agreements (25%).
Rescheduling payment terms for current debts with suppliers and
the extension of payment terms have lead to a significant increase
of outstanding payables, which is negatively impacting the cash flow
and the liquidity of suppliers.
Key findings of the quantitative analysis and
benchmarking of 300 Romanian companies
For understanding how effective Working Capital Management is
applied in Romanian companies we have analyzed the 2008 Financial
Statements of 300 leading companies from different industries. The
following metrics were used for the analysis:
• Days of Working Capital (DWC) is a metric that expresses the
length of time, in days, that it takes for a company to convert resource
inputs into cash flows. The DWC attempts to measure the amount
of time each net input Euro is tied up in the Production and Sales
process before it is converted into cash through sales to customers.
• Days of Sales Outstanding (DSO) expresses the average number
of days that a company takes to collect revenue after a sale has been
made. A low DSO number means that it takes a company fewer days
to collect its accounts receivable. A high DSO number shows that
a company is selling its product to customers on credit and taking
longer to collect money.
Not planned
N=143
78
Optimization of Sales and Planning are the most widely
used approaches in Stock Management
• Days of Inventories Outstanding (DIO) is an indicator providing
investors with an idea about the time needed to convert stocks into
cash. Generally, the lower the value, the better, yet it is important to
note that average values vary from one industry to another.
• Days Payables Outstanding (DPO) is an indicator showing how
long a company is taking to pay its trade creditors. Basically, the
higher the indicator value, the better, this aspect is however positive
only as far as the company is able to pay the debt at a given time.
Consumer and Industrial Goods – The DSO of 71 days is
indicating that it has become difficult to collect outstanding payments
from debtors. Stocks are converted into Sales in an average of 51 days.
Retail and Distribution - Companies in this industry are
averagely the most affected in terms of collection performance - 33
days. A possible explanation for the short DSO could be that Retail is
not operating with lines of credit.
Working Capital Indicators by industries (N=300)
Industrial & Distribution &
Consumer
Telecom & IT
Retail
Goods
DSO*
DPO*
71
-184
DIO*
DWC*
34
-54
96
-64
51
Pharma
110
-208
8
-15
-208
Total
•The consolidation of the supplier base leads to an increase of
volume per supplier > better prices and delivery terms.
-174
63
-45
78
78
-205
22
-94
Transport
•A more accurate Sales Planning provides key information for
Demand and Inventory planning for raw materials, semi-finished
and finished products > reduction of safety stocks.
15
-77
32
-57
*Indicators are industry average values.
Telecommunications - The long collection recovery period
(96 days on average), together with long trade sale payment periods
(208 days on average) are typical for the Telecommunication Industry.
• Reducing the number of product variants can help reducing the
number of raw materials and alternatives of semi-finished products.
• Renegotiating frame contracts: Postponing agreed deliveries,
reducing ordered quantity and increasing the call off / ordering cycle
(less volume per order) are effective measures for reducing stock levels.
•Organize special sale initiatives to reduce finished product
stock with low stock movement.
• Receivables Management:
Pharmaceuticals - Long DSO (110 days on average), along with long
trade sale payment periods (208 days on average) can be explained by
the big delays in payment in the Romanian Health Care system.
Transportation – The DPO of 205 days should be considered
together with the need for flexibility and a rapid adaptation to customer
requirements, in order to differentiate from competitors in the market.
Total – Compared to German speaking countries (DACH) it seems
that Romanian companies are compensating their difficulties in
collecting outstanding Sales with late payment of suppliers. Overall,
this behavior is threatening the liquidity of suppliers and cannot be
seen as a sustainable strategy for improving Working Capital.
Comparison of Working Capital indicators DACH - Romania
Days of Working Capital
(DWC)
Days Sales Outstanding
(DSO)
RO
-57
DACH
64
DACH
41
Days Inventory Outstanding
(DIO)
RO
78
Days Payables Outstanding
(DPO)
•Credit assessment and risk management. The
creditworthiness for each client should be determined based
on certain financial and non-financial indicators. There are also
safety measures to be implemented, such as blocking customers
exceeding credit limits, goods insurance or delivery against cash.
Moreover, a “risk fee” for the entire customers portfolio may be
applied in order to reduce the expected losses associated with
debt payment failure.
•Contract management. Special focus should be put on
implementing unitary payment terms (payment methods and
conditions) and the definition of clear contract terms, such as
collection costs and late payment penalties.
•Monitoring debtors and outstanding payments by working
out a set of indicators for performance monitoring. The defined
indicators provide a comprehensive overview of the client
portfolio and flag non-performing debtors.
•Dunning procedure: Clearly defined steps and rules applied
by collection and sales agents ensure an uniform procedure and
higher performance of the dunning process.
• Payables Management: Constantly delaying payments to the
detriment of the suppliers cash flow can harm the long-term relationship
with suppliers. Therefore a differentiated approach is required,
considering supplier-related risks in the optimization of payables.
Working Capital Management - Best practices
• In-depth knowledge of contractual terms. A proper and
constantly updated database allows an accurate monitoring of the
outstanding trade sale debts, precisely indicating due dates, penalty
values for delayed payments etc. It is highly important for all this
information to be transparent, in order to perform a prioritization if
there is insufficient money available to make all payments.
One of the reasons why Working Capital Management is not
delivering sustainable results is the lack of an integrated, crossfunctional approach considering strategic as well as process oriented
aspects along the value chain.
•Standardizing payment terms can offer the starting point for
renegotiations of terms and conditions. E.g. reception of goods
and materials shall be the defined starting point for the credit
period not the issue date of the invoice.
• Stock level optimization. While a low stock level leads to production
decrease and thus sales decrease, and excessive stocks lead to higher
storage costs and unproductive blocking of capital, an optimal stock
level is to be determined for a good business management.
•Developing a long term partnership with key suppliers. If the
debts can not be paid on time, understanding and cooperation
is required to overcome the difficult situation. A good negotiation
strategy as well as a high flexibility degree can improve relations in
the context of late payments.
DACH
47
RO
32
DACH
24
RO
174
Number of companies in DACH: 841; number of companies in Romania: 300.
• Stock optimization. In growth phases the availability of key
resources and materials must be ensured, hence companies are
focused on assuring the supplies for a high capacity utilization in
Production. The Stock optimization should focus on strategic, tactical
and operational measures to reduce the liquidity tied-up in raw
materials, semi-finished and finished products:
Our research indicates that Working Capital Management has
become a priority for half of the participating companies within
the last 12 to 18 months. Therefore Romanian companies have
still significant improvement potential in the way they manage
receivables, stocks and payables.
Romanian Business Climate
79
Overview - influences on the working capital
Process
related
actions
• Order processing
• Purchase planning
• Supplier Management
• Inbound logistic
• Claim Management
Stocks
• Demand planning
• Inventory planning
• Production planning
• Supply Chain Management
Production
Liabilities
Strategy
oriented
actions
• Product development
• Product portfolio management
• Costumer strategy & management
• Examination of credit-worthiness and credit decision
• Terms of payment
• Receivable monitoring
• Receivable relization
Warehousing finished
products
Receivable
encashament
Working Capital cycle
• Distribution strategy & control
• Supply Chain strategy
• Purchasing strategy
Kurt Weber
Managing Director / E-mail: kweber@horvath-partners.com
Kurt Weber is the Managing Director of Horváth & Partners Management Consulting in Bucharest. Kurt holds a Diploma
in Business Administration and Economics from the University of Hohenheim, Germany. From 1997 to 2001, prior to his
assignment with Horváth & Partners, he has worked for companies such as Mercer Management Consulting, Bayer Corp.
USA, Nordenia International Hong Kong and KPMG Consulting. Kurt joined Horváth & Partners Germany in 2002 and since
2006 he is in charge of developing the operations of the Bucharest office. With a broad experience in strategic management,
process management, performance management and controlling, Kurt Weber has been involved in numerous consulting
projects in the petrochemical industry, manufacturing, retail and distribution, industrial goods, services and public
transportation. He has achieved solid expertise in post merger integration, restructuring, change management, controlling
and finance. He is an experienced trainer and moderator.
Aura Cadis
Managing Consultant / E-mail: acadis@horvath-partners.com
Aura Cadis is Managing Consultant with Horváth & Partners Romania, having a broad experience in process optimization,
development and implementation of controlling systems and strategy implementation. Aura studied Economy and
Business Administration at The Academy of Economic Studies in Bucharest, where she was an assistant professor after
graduation. In 2003 she obtained the Diploma in Management and in 2007 the MBA degree, both from Open University
Business School (UK). Aura followed a Business & Industry Leadership Program at Lee Iacocca Institute USA. Previously
she worked for Robert Bosch GmbH (Germany, France) and also Porsche Romania, as Product Manager for Volkswagen
Romania. In 2007 she joined the Horváth & Partners team. She has expertise in: controlling, process and cost optimisation,
performance audit, implementation of CRM programmes, acquisitions and exports optimisation, development and
organisation of human resources. With 8 years experience, she was involved in projects in the automotive industry, IT,
FMGC, utilities and retail.
Aniko Somodi
Managing Consultant / E-mail: asomodi@horvath-partners.com
Anikó Somodi is Managing Consultant with Horváth & Partners Management Consulting, being also responsible
for developing the training services of Horváth Academy in Romania. She holds a degree in Economy and Business
Administration and a Masters’ Degree in International Relations at Babes-Bolyai University Cluj. Before joining the
Horváth & Partners team in 2005, Anikó was research assistant at the same University. With 5 years experience in Change
Management, Business Process Reengineering, process and organizational development, procurement, SAP (process
alignment), implementation of Controlling and performance management tools, Anikó has achieved expertise in the
petrochemical and pharmaceutical industry, retail, IT, utilities and services. Anikó was involved in numerous consulting
projects which included : international Post-Merger Integration, multi-location restructuring and process-optimization
of the purchasing organization, business support for SAP implementation, optimization of procurement processes and
organization, evaluation and audit of the organization and performance management system, design and implementation
of controlling activities, audit of the main business processes on company level.
Horváth & Partners Management Consulting S.R.L.
Strada Cretei nr. 12, 014154, sector 1, Bucuresti
Phone: +40 31 620 1888; Fax: +40 31 620 1889
www.horvath-partners.ro
80
Romanian Business Climate