The Finance Department defines medium- and long-term liquidity requirements based on the levers of the strategic plan (acquisitions, investments in capacity, commercial development, etc.).
Context and challenges
Sources of financing are negotiated with institutional lenders or raised from bond investors, and the respective maturity periods are established according to milestones in the strategic plan.
Once the sources of finance have been negotiated and obtained, the Finance Department will need to secure free cash flow (surplus cash available to repay debts and pay out dividends), to maintain enough liquidity to:
- Minimize the use of short-term liquidity lines, which are often costly
- Maintain the liquidity ratios negotiated in financing contracts
- Make liquidity line repayments on time (interest and principal)
- Retain enough borrowing capacity to seize new opportunities or address constraints
Cash optimization levers can be identified through an analysis of the following end-to-end processes: Order-to-Cash (accounts receivable), Procurement-to-Pay (accounts payable), and Invest-to-Cash (Capex). The levers are operational, so management needs to decide what to measure, roll it out to the Business Units (BU), then challenge and improve it.
Below are examples of cash optimization levers for each process:
- Cascading the Days' Sales Outstanding (DSO) measurement for each sub-process (DSO for invoices to be issued, DSO for invoices not yet payable, DSO for invoices payable, DSO for contested invoices)
- Identifying the causes of the customer invoice rejection rate and, based on that, deciding on which action to take regarding processes and responsibilities
- Implementing an operational management system
- Mobilizing management teams by cascading DSO targets within the organization
- Implementing a Days' Payable Outstanding (DPO) indicator
- Standardizing contractual payment terms, followed by negotiations between suppliers and Procurement
- Updating supplier base in the payment module, to secure contractual payment dates
- Implementing tools to simulate projected cash flow in relation to significant investments
- Including impact analysis options in these tools for the lease-make-or-buy decision
- Implementing governance
How can Argon Consulting help you?
Argon Consulting provides assistance not only in the process of diagnosing and identifying value chain optimization levers but also in the project implementation phases.