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Increasing the profitability of working capital programmes

Improvements in working capital management will enable all organisations to create value and enhance the way they operate. According to PWC, there is €1.2tr of excess working capital tied up on balance sheets.  Those who release the blockages which hide this capital will be able to boost growth and create more potential for investment.

Evaluating and structuring the programmes designed to release working capital can be a complex process and may involve many parties with different priorities. Technology can mitigate the operational risk associated with manual analysis and structuring, as well as improving visibility and unlocking potential. However, industry experience and a refined process to support the technology is every bit as important.

This blog discusses the problems and solutions involved in launching new working capital programmes, and how to reduce risk and secure better outcomes for all parties through a combination of technology and a detailed systematic process.

 

Challenges in working capital programmes

Anyone involved in working capital finance programmes will almost certainly have experienced the frustrations of trying to see things clearly enough early enough.  This is necessary to support effective structuring for ongoing management, and to avoid the risk presented by poor practice. In the early stages, many issues can trap decision-makers in an endless loop of inertia, indecision and over-analysis. When the programme is incepted, disjointed processes, the inability of debtors to see the behaviour, and changes in the risk profile are commonly cited as some of the main challenges faced in this sector. For example:

  • Portfolio evaluation - with working capital finance programmes, it is clearly vital to gain a full understanding of the portfolio’s profile and performance. Discrepancies in methodology between the various parties, as well as different manual or technology-based analysis tools, can lead to confusion at this important stage. The result could be that a programme that doesn’t fit the client’s needs.
  • Behavioural analysis – traditional analysis methods may provide a reasonable view of the basic behaviours that underpin the risk profile of the portfolio at any point in time. However, the subtleties that can precede material changes in the portfolio, or even fraudulent behaviours, can be nearly impossible to spot. Changes in patterns of payments, size or frequency of invoices, or even when and how invoices are settled, can be indicators of potential problems.
  • Programme Compliance – it’s relatively simple to ensure that the invoices to be funded are in line with the defined eligibility structure on day one. However, details such as the order of the rules to be applied can make a material difference to the outcome. Testing is required and the analysis of the structure prior to funding can be very time-consuming. Initial testing is generally done with a single snapshot of data, and it is very difficult, if not impossible, to test for all scenarios. This means that non-performance and unanticipated risk to the programme may go unnoticed.
  • Reporting and alerting – one of the key challenges of the effective running of a funding programme is the need for consistent, effective reporting and alerting:
    • Much reporting of performance is still done via weekly or even monthly feeds of data. With such long periods between reports, negative changes to programme performance can often be impossible to remedy by the time they are identified.
    • Traditional reporting methods often rely on analysts keeping a close eye on the data and reporting their findings to risk committees and other stakeholders. This manual process can mean subtle, behavioural changes that can be precursor to fraud or significant changes in risk can extremely difficult to identify in sufficient time to act.  
    • With multiple parties to a transaction, reporting requirements can lead to misunderstandings and discrepancies in the way that the portfolio performance is seen.

 

Systematic analysis and technology

Recently, many column inches in the trade press have been devoted to the coming together of finance and technology. The world of finance certainly operates more efficiently when using new technology solutions, with more accurate results and a better experience for users. However, if technological innovation is based on a disjointed process, you are simply automating a bad process which will yield inaccurate results.

To unlock the potential in working capital programmes you need to be able to:

  • evaluate the potential of a programme to enable all parties involved to make quick go/no-go decisions
  • deliver effective analysis of the portfolio to allow all parties to move quickly through structuring, armed with all the right information rather than a mass of unrelated information
  • protect the programme through the systematic application of rules so that only assets eligible for the programme are included
  • grow the programme with the confidence that precise insight and control is provided to all parties, who can then invest and grow the programme with confidence

The only way to achieve this is to have highly refined technology able to evaluate the portfolio, operated by people with years of experience in the industry. This combination of technology and experience enables all parties to implement the programme and the right protection against operational and financial risks. The result of this combined power means that everyone involved in the programme is well positioned for accelerated growth.

At a time when so much working capital is locked up and businesses are under pressure, this can be a powerful solution to many of the problems we are about to encounter.

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Ben Grant

Ben Grant

Commercial Director

Aronova

Member since

25 Jun

Location

London

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