Working Capital is not a dirty word, is it?
There is no dispute that one of the hardest organizational barriers to break is the one between Finance and Operations. Accountants and treasurers do not go very well with manufacturing, logistics, and procurement. They have different tasks and different (if not necessarily divergent) objectives, which exacerbate the gap. It is often said, to explain such behavior, that neither side had a real reason to “mingle” and cooperate beyond the basic courtesy of being employees of a same company. But “today” is making things quite different, and models of the recent past will hardly apply to the future scenarios, as soon as the recession dust settles down. "Cash is king" is the refrain in today’s economy, and working capital is the most direct, and effective, metric that measures the health of a corporation. While Treasurers are very familiar and comfortable with the intricacies of what it takes to improve the value of the figure, operations people are not. Just yesterday I was at a meeting of logistics and supply chain managers.
I was impressed to listen the presenters mention “working capital” quite a few times. My initial enthusiasm to listen logistics managers finally speaking the finance vocabulary came to a halt, however, when I heard comments along the lines of ”The benefit achieved from this project is that we increased (italic intentional) our company’s working capital.” After an unavoidable shiver, I calmed and realized that they wanted to express something quite different. As a matter of fact, the increase was in the final result of the corporate financial statement, thanks to a reduced need for working capital.
Moving away from the semantic analysis of the various other statements heard on the subject of working capital, one item appears clear: operations people are still far away from confidently handling matters that traditionally belonged on the other side of the wall.It should be a priority for corporate decision-makers to ensure these barriers eventually tumble down. When definitions are mis-communicated, they surface an inherent lack of understanding of the subject. In a world continuously revolutionized by changing dynamics and paradigms, it is not an option to fumble for results.
The first barrier to break down is the one of corporate language, and operations people should not shy away from terms that sound “financial” and, therefore, out of scope. Understanding of working capital, and of the levers needed to impact its value, should be the first practical test-bed where finance and operations meet to produce positive results for the corporation they both work for.