According to the 2024 JP Morgan Working Capital Index Report, top and bottom performers exhibit a wide variance in the cash conversion cycle. The same report mentions that there is an opportunity to unlock $700b+ of working capital as free cash flow, with Days Inventory Outstanding (DIO) representing the most incredible opportunity.
Yet, most manufacturers struggle to make remarkable improvements in their working capital efficiency. Last year, 23.5% of working capital was utilized for unplanned scenarios, and only 22% of invoices were paid early in the industry. So, what keeps the industry from realizing this untapped potential concealed within the organization?
Hurdles to optimizing working capital efficiency
The objective of optimizing working capital efficiency can feel like a climb up the Penrose stairs, especially in the face of supply chain disruptions and intricate competitive dynamics. Here are some other hurdles to improving working capital efficiency in manufacturing:
- Inefficient inventory management: Results in either surplus stock, which unnecessarily ties up capital, or shortages that disrupt production and erode customer trust.
- Extended accounts receivable periods: Strains cash flow, increasing the risk of bad debts and limiting funds available for reinvestment.
- Suboptimal fulfillment practices: Late deliveries, long lead times, manual rework, and unbilled orders extend outstanding inventory and prolong revenue realization.
- Inadequate financial data: Hinders informed decision-making and proactive management of working capital.
- Fluctuating customer demand: Makes it hard to maintain optimal inventory levels and align production schedules.
Lastly, inadequate monitoring of suppliers' financial health exposes companies to risks of supply interruptions and unforeseen costs. This leads to unplanned capital deployment, which impedes the activation of levers that could otherwise be mobilized to optimize capital usage.
Optimizing working capital efficiency
With improved management practices and effective tools, companies can enhance their working capital by 10% to 20% on average. The trick to attaining such outcomes is to know the sources of inefficiency—in other words, where your capital lies trapped and what causes these issues.
Know thyself: The secrets lie within your organization
The devil isn’t just in the details — it’s lurking in the millions of transactional breadcrumbs scattered across the ERP, cloud platforms, data warehouses, and financial systems. But traditional financial reviews won’t help you uncover them.
That’s where process mining can help. Done right, it helps reveal hidden inefficiencies by reconstructing end-to-end processes from system logs and transactions. Instead of relying on gut instinct or scattered reports, companies can now see exactly where the leaks and inefficiencies occur.
The insights from process mining can help businesses spot millions of dollars in trapped working capital across the following avenues:
- Supply chain bottlenecks: Idle stock and sluggish procurement cycles that tie up cash.
- Invoice-to-Cash gaps: Late payments from customers that disrupt liquidity.
- Payment terms misalignment: Suppliers are getting paid faster than customers pay you, creating a cash crunch.
Without visibility into these areas, executives fly blind and make ad-hoc decisions that often miss the real root causes of capital inefficiencies.
Activating key levers: Expenses that pay for themselves
Once the insights are in hand, the next step is to unlock trapped capital using a structured roadmap, which tells you what levers to pull first.
Here’s where businesses typically find the most lucrative wins:
- Order-to-Cash acceleration: Cutting down invoicing cycles, reducing unbilled orders, and automating collections to ensure the money reaches your account faster.
- Procure-to-Pay optimization: Aligning vendor payment terms with cash flow needs to avoid premature cash outflows.
- Process variants and conformance checks: identifying and eliminating inefficient deviations in standard workflows to reduce costs and speed up execution.
With the right prioritization strategy, companies can reinvest liberated capital into further transformation — making optimization a self-sustaining cycle rather than a one-time fix.
Transition to a cash-positive operating model
When done right, working capital efficiency isn’t just a financial strategy. It’s a source of competitive advantage, especially in today’s fragile macroeconomic and geopolitical environment. At Birlasoft, we have helped clients excel in this climate by helping them spot millions of dollars of working capital in the nooks and crannies of their operating model.
