Staying in the Game: Why and How to Optimise Working Capital in Times of Volatility

In brief: AI-powered working capital optimisation can help companies achieve outsized returns in times of volatility

Introduction

Much has been said recently about disruption across the financial landscape. Finance teams face the challenge of managing short-term obligations while investing in long-term growth, digitalisation, and sustainability efforts. Recent studies show that optimising working capital is crucial for developing 'systematic resilience': allocating funds strategically to withstand disruptions and pursue key strategic goals.

This article provides an overview of the importance of working capital management and how Gardenia’s AI-powered platform makes managing working capital a strategic asset. With Gardenia, your team can manage risk and capture emerging opportunities.

Why Optimise Working Capital Now??

‘With rising interest rates, a dollar borrowed incurs more debt than it used to, and a dollar invested carries greater yield opportunity than it used to’, JP Morgan reports.?

Teams that optimise their working capital can cover short-term costs and investments - whilst others must focus on survival and resort to costly external financing.?

By optimising working capital you can:

• Access your cheapest source of capital: Improving working capital frees up money stuck in inventory, receivables, and payables without extra financing costs
• Invest while others put out fires: During uncertain times, many companies prioritise saving money and reducing immediate risks. Meanwhile, businesses that invest in new areas like sustainability and AI transformations can grow faster and outpace competitors.

The Key to Systematic Resilience

In this environment, businesses need to develop ‘systematic resilience’: the set of dynamic capabilities needed to withstand shocks, adapt to change, and deliver long-term transformation.

From a financial perspective, working capital is the key to systematic resilience capacity-building.

By optimising working capital, companies can:?

• Absorb shocks: 36% of companies report that working capital management has helped them increase financial buffers to absorb shocks.
• Adapt to disruptions: 70% of companies expect that responding to geopolitical risks will increase their costs. Through forward-looking working capital management, companies can absorb these costs and maintain operational agility.
• Investments in long-term growth: 82% of business leaders believe that companies must invest in digital transformation now or be left behind. Optimised working capital provides the free cash flow for investment in imperative innovations.

Achieving Outsized Returns

A BCG study on companies rebounding from the 2009 financial crisis found that those focusing on cash optimization significantly outperformed others. Similarly, McKinsey's analysis across over 1,000 public companies showed that just a 5% reduction in working capital could lead to more than a 2% increase in annual returns, amounting to a 27% boost in return for shareholders.

These findings highlight how optimising working capital not only provides a buffer during economic downturns but also allows companies to swiftly shift from cost-cutting to investing in growth opportunities, enhancing recovery and resilience.

Challenges in Working Capital Management

Managing working capital is essential for a company's success but comes with its challenges. It's often a complex and time-consuming task, with many businesses struggling to see improvements.?

A study by PwC from 2014-2022 found that only 44% of sectors have improved their working capital efficiency since 2020, with significant variability in performance even among companies within the same industry.?

The main issues include data being scattered across different systems (data silos), reliance on manual and error-prone processes for analysing data, and poor implementation of working capital programs.

Data Silos?

Effective working capital management requires a clear picture of performance across the company. However, many companies store critical working capital data across several ERP systems, creating a disjointed and inconsistent data landscape known as data silos. This can lead to inaccurate insights and decisions.

Manual Analysis

Typical working capital management workflows rely on manual processes for data collection, consolidation, and analysis, which are time-consuming, prone to error, and limited in scope. This leads to the creation of backward-looking and dated reports, which are difficult to use for strategic decision-making.

Poor implementation

Poor implementation is another issue that can arise due to a lack of real-time initiative tracking, a lack of granular improvement levers, and poor cross-functional collaboration.

To overcome these challenges, companies should consider:?

1. Implementing automated data consolidation and harmonisation tools to eliminate data silos?
2. Using an advanced analytics tool to deliver real-time analysis of working capital KPIs, process issues, and line-item implementation levers to implement selected initiatives.
3. Set up live gap-to-target tracking to ensure that selected initiatives are met
4. Ensure cross-functional collaboration and a data-driven approach to working capital through a centralised financial management platform.

By addressing these challenges, businesses can improve the effectiveness of their working capital management programs and achieve better financial performance.

How Gardenia Can Help?

Gardenia Technologies offers an end-to-end solution for optimising your working capital. Aided by AI-driven automation, our platform provides complete visibility into working capital performance, and a set of data-driven improvement levers for optimising your cash flow.

• Data Factory: Collect, Transform, Enrich: Built-in 'Data Factory' unifies your cash flow data. Out-of-the-box data pipelines connect to siloed Management Systems (i.e. ERP, TMS) and consolidate data into a single, standardised format.?

• Intelligence Layer: Enhance, Map & Analyse: The Intelligence Layer employs Machine Learning workflows to analyse the collected data and identify historical patterns, surface root causes behind performance, and recommend targeted initiatives to optimise future working capital - in real-time.
• Web Dashboards: Visualise, Recommend, Report: Comprehensive cash flow data is presented in web app dashboards and refreshed daily. Dashboards provide a centralised cockpit for AR, AP and Treasury tools to analyse trends, identify line-item improvement levers and track performance.

• GenAI Chatbot: Query, Understand & Retrieve: Natural language interface to your data, allowing you to ask questions and receive answers in plain language. The chatbot can access a variety of data sources, including SQL databases and text documents. Opening up your data to any question, any time.?

Volatility brings risk, but for prepared businesses it can bring strategic opportunities. Gardenia Analytics can help you stay ahead of a changing business environment. Speak to Gardenia today to assess the value-creation opportunity. Schedule a demo.