WORKING CAPITAL BOTTLENECKS

Well done, you made it to #ThrowbackThursday! As is our habit, we're taking a look at Baker Ing's resource library to see what gems we may have forgotten about.

This week, we focus on optimising working capital by identifying and removing bottlenecks in business processes.

For the best reading experience, we suggest downloading the original document from our website: Download the White Paper.

This guide provides insights and practical steps for credit management professionals to enhance efficiency, reduce costs, and improve working capital.

We invite you to read through and share your insights!

Disclaimer: Information may have changed since original publication date.

Checklist

Context

Working capital management is, of course, a crucial aspect of any business, as it determines a company's ability to meet its short-term obligations, invest in growth opportunities, and maintain its ongoing operations. For credit management professionals and other financial experts, understanding how to optimise working capital in order to mitigate the risk of financial distress and ensure the longterm success of the organisation is their bread and butter. One way to do this is by identifying and removing bottlenecks in business processes.

A bottleneck is a point in a process where the flow of work is restricted or slowed down, leading to inefficiencies and delays. These bottlenecks can have a significant impact on working capital, as they can lead to increased inventory, extended accounts payable and receivable, and decreased cash flow. By identifying and removing bottlenecks, credit management professionals can improve operational efficiency, reduce costs, and increase working capital.

To identify bottlenecks, credit management professionals can start by analysing the flow of work and identifying areas where delays or inefficiencies occur. This could include areas where work is waiting for resources, approvals, or frequent errors and rework is taking place. It's also important to consider the impact of bottlenecks on other parts of the process, as one bottleneck can create downstream effects.

Specifically, credit professionals can identify bottlenecks by collecting and analysing data regarding processing times, resource utilisation, and error rates. Some ways to identify bottlenecks might include:

1. Mapping out the business process: Creating a visual representation of the business process can help credit management professionals to identify where bottlenecks occur and understand how they impact the overall process.
2. Observing the process in action: Watching the process in action to see where delays or inefficiencies occur, this can be done by personally undertaking the process or shadowing employees.
3. Collecting data: By collecting data on processing times, resource utilisation, and error rates,credit management professionals can understand the scope of the problem.
4. Analysing the data: Once data has been collected, one can analyse it to identify trends and patterns. This can be done using process flow analysis or other analytical techniques. Process flow analysis, statistical process control and/or other analytical techniques can be useful.

Once the bottlenecks have been identified, credit management professionals should gather data to understand the root causes of the delays or inefficiencies. This could include analysing data on query and error rates. This data can help professionals understand the scope of the problem and identify the specific causes of the bottlenecks. In addition to this, they might further perform a root cause analysis, using tools such as fishbone diagrams, 5 Whys analysis, or other root cause analysis techniques, to understand the why the bottlenecks occur.

After the bottlenecks have been identified and analysed, the next step is to prioritise them based on their impact on working capital. Prioritising bottlenecks allows credit management professionals to focus on the most critical areas first – that is, where the biggest impact on working capital can be achieved for the least resource investment. We can determine the impact of different bottlenecks on working capital by looking at the financial impact of the bottlenecks on key metrics. These metrics may include:

1. Accounts receivable: Bottlenecks in the sales process or billing process can lead to delays in receiving payments from customers, which can have a negative impact on working capital.
2. Inventory: Bottlenecks in the supply chain or production process can lead to excess inventory, which ties up working capital.
3. Accounts payable: Bottlenecks in the purchasing process or vendor payment process can lead to delays in paying bills, which can have a negative impact on working capital.
4. Cash flow: Measuring the impact of bottlenecks on cash flow helps us understand the impact.

One may apply different financial analysis and modelling techniques to assess the impact of different bottlenecks and can also use ratios such as the current ratio, quick ratio and working capital ratio to evaluate the situation. Additionally, metrics such as days sales outstanding (DSO), days payable outstanding (DPO) and days inventory outstanding (DIO) will quickly show the impact of bottlenecks on working capital. It's important to note that the impact will, of course, vary depending on the type of bottleneck and the organisation.

Once the bottlenecks have been identified, analysed, and prioritized, the next step is to develop solutions to remove them. This could include process improvements, automation implementation, or changes in resource allocation. It's important for credit management professionals to involve the right people in this process, such as process owners, business leaders, and subject matter experts.

Solutions should be developed as part of a holistic approach, taking into consideration the entire process, not just the specific bottleneck in question. There are several steps that can be taken to ensure the right people are involved and practical solutions are developed collaboratively:

Assess the Process

Understand the business process and identify which departments and individuals are involved. This will give you a good idea of who should be brought into identifying bottlenecks and developing solutions. Some ways to identify such might include:

• Look for organisational charts, policy and governance documents, and other documentation that describes the who is involved process.
• Speak to employees who perform the process on a regular basis. Ask them about their experiences and challenges they face while performing the process and understand who they interact with.
• If they do not already exist, undertake process mapping techniques such as Value Stream Mapping or Process Flow Diagrams, these can help to understand the process and identify who needs to be involved.

Identify Stakeholders

Identify the stakeholders who will be affected by the changes. This will include employees who work in the affected areas, as well as any other individuals or departments who may be impacted. Stakeholders are individuals or groups who will be affected by the changes or who have an interest in the outcome of the process.

• Identify departments and individuals impacted by the process: Identify who will be affected by any changes, whether positively or negatively.
• Identify internal stakeholders (employees, departments, etc.) and external stakeholders (customers, suppliers, shareholders, etc.).
• Identify the individuals or groups who have the power to make decisions or approve changes.
• Look for feedback from employees, customers, suppliers, and other stakeholders to understand their perspectives and concerns.
• Assess the level of dependency each stakeholder has on the process or outcome of the process, this will help to prioritise which stakeholders to involve.
• Take into account any legal or regulatory requirements: Some stakeholders may need to be involved by law, compliance or per regulations.

Engaging with the right stakeholders from the beginning of the process will help to ensure that the solutions developed are more likely to be successful, and it will also help to ensure that stakeholders feel more invested in the process.

Speak to the Experts

Identify the experts in each area. These are individuals with a deep understanding of the process, who can provide valuable insights and ideas on how to improve it. There are several ways to identify experts within the organisation:

• Speak to other department heads, managers and colleagues to get their recommendations for experts in specific areas.
• Review employee performance metrics to identify those who consistently perform well and have a good understanding of the process.
• Check if any of the employees have any relevant certifications or awards.
• Identify employees who have experience working in multiple departments or on cross-functional teams. They may have a broader understanding of the business and be able to provide valuable insights.
• Check the job descriptions of employees to see if they have any relevant responsibilities or experience.
• Look for employee engagement in relevant training or knowledge sharing programs, workshops and webinars: This could indicate a level of interest and expertise in specific subjects
• Review employee's past projects or successful assignments: If an employee had accomplished an important task or project recently, it's likely that they have the knowledge and skills to help again.

It's important to note that expertise can be developed over time and that an expert in one area of the business may not be the best expert for another area. Nevertheless, involving experts in the process will lead to a more effective outcome, as they are more likely to have the knowledge and skills necessary to find solutions to the problems at hand

Analyse the Data

Use data analysis to identify any individuals or departments who consistently experience bottlenecks or have high error rates. They will be important to include in the process of identifying and removing bottlenecks. Some examples:

• Measure the average payment terms and compare it to industry standards. Longer payment terms can indicate bottlenecks in the credit approval or collection process.
• Measure the credit risk level of customers and compare this to company's credit policy and industry standards. High credit risk levels can indicate that the credit approval process needs to be tightened or bottlenecks in the credit analysis process.
• Measure how much of the credit limit is actually being used by customers and compare this to industry standards. High utilisation can indicate that the credit approval process is too lenient or there is a bottleneck in the credit management process.
• Measure the number of disputes raised by customers and compare this to industry standards. High dispute rates can indicate the process and/or systems are not effective.
• Measure the level of bad debt as a percentage of total credit extended and compare it to industry standards. High levels of bad debt can indicate the credit approval process needs to be tightened, or that there is a bottleneck in the credit management process.
• Measure how well the credit management process is performing, with metrics like DSO (Days Sales Outstanding), DPO (Days payable outstanding), DIO (Inventory turnover) and DPO (days payable outstanding)
• Gather feedback from customers regarding the credit management process, this can help identify pain points and bottlenecks in the process.

By comparing results to industry standards and benchmarks, they can get a clearer picture of how the credit management process is performing and where changes need to be made in order to optimise working capital.

Get Buy-In

It's important to get buy-in from those involved in the process early on, to ensure they are committed to the changes that are being proposed. Some ways credit professionals can get buy-in from stakeholders:

• Clearly communicate the benefits of optimising working capital to stakeholders, such as increased efficiency, improved cash flow, and reduced costs.
• Involve stakeholders in the process: Involve stakeholders in the process of identifying and removing bottlenecks. This will ensure that their concerns and ideas are taken into account, and they feel more invested in the process.
• Share data and analysis with stakeholders that demonstrates the need for change and how it will improve the process.
• Communicate regularly with stakeholders to keep them informed of progress and address any concerns they may have.
• Show empathy and understanding for the concerns of the stakeholders and how the change will impact them.
• Make sure that stakeholders are equipped with the necessary skills and knowledge to perform the new process and provide adequate support for implementation.
• Implement a small change early on in the process that will show the benefits of the change and help stakeholders understand the benefits of the overall process optimization
• Build a coalition of stakeholders who support the change and have influence with other stakeholders.

By taking these steps, we can gain buy-in from stakeholders and ensure that the changes made to optimize working capital are sustainable. Keep in mind that getting buy-in is a continuous process; the stakeholders must be engaged and informed throughout the process and not just at the beginning.

Implementing your solutions well is crucial. Credit management professionals should ensure that their solutions are properly tested and the right people are trained in them. It's also important to measure the results of the implementation to ensure that the solutions are having the desired effect. This is a continuous process, not just a one-time exercise. Continuous monitoring and measuring of the business process, tracking the working capital situation, identifying what is working and what is not, and making the necessary adjustments are key.

One example of a commonly implemented solution to solve such bottlenecks is streamlining the accounts receivable process. This is to say that by automating invoicing and payments, and by implementing early payment discounts along with other mechanisms which reduce ‘friction’ in payment, credit management professionals can reduce the time it takes to get paid and increase the cash flow, thus improving the company's working capital situation. Another great example is making improvements in management information as a preventative measure against bottlenecks. Having a solid understanding of the company's cash flow and a clear view of the company's short-term financial obligations is key. This includes not only cash flow forecasting but, having a granular understanding of the company's accounts payable and accounts receivable at any time. By having this information readily available, credit management professionals can proactively identify and address any issues before they become major problems. A few specific tools and methods that can be particularly useful:

• Credit management software: There are a variety credit management software options available which can help track and manage accounts payable and accounts receivable. These software platforms allow assessment of creditworthiness, set credit limits, automate credit decisions and payment collection processes, and track credit balances, ageing, and payment history.
• Credit reporting services: Credit reporting services provide credit professionals with detailed information on a company's credit history and financial stability. This can helps us better assess the risk of a particular customer or supplier, and make more informed decisions about extending credit or setting credit terms.
• Credit risk analysis: Credit risk analysis is the process of evaluating the creditworthiness of a customer or supplier. Credit professionals may use various methods, including financial statement analysis, credit scoring, and reference checks, to assess the risk of a particular customer or supplier. There is also machine learning and predictive analytics software coming on to the market which makes such analysis incredibly sophisticated and useful.
• Communication and Collaboration: In order to make sure credit professionals are always up to date with the accounts payable and accounts receivable, we need to work closely with other departments and team members. For example, by communicating with the sales team, we can quickly identify any changes in customer's habits and, potentially, creditworthiness. Similarly, by working closely with the accounts department, we can be sure that we are aware of any issues with working capital and take action accordingly.

To further optimise working capital, credit management professionals may also take advantage of financing options such as factoring, supply chain financing and trade finance. These options can free up working capital that would otherwise be tied up in accounts receivable or inventory, perhaps whilst more permanent improvements are made to processes. Outsourcing credit control and debt collection is another option and can be beneficial as both a temporary measure, but also incorporated into the final process. Outsourcing to a specialist collections organisation offers costeffectiveness, specialised expertise, improved compliance adherence, access to specialised technology, scalability, flexibility, language/cultural skillsets, and detailed reporting, amongst other benefits.

Summing-up

Removing bottlenecks is an essential step for credit management. By identifying bottlenecks, analysing the root causes, implementing solutions, and continuously monitoring the process outputs, we can improve operational efficiency, reduce costs, and increase working capital. It's important to take a comprehensive approach and consider the entire process, remaining pro-active in monitoring to ensure that any bottlenecks that do occur are identified and removed quickly.