Lean Working Capital Management: Embedding Best Practices for Revenue Maximization and Profit Optimization

By Cotis, Lucia | Business Credit, January 2004 | Go to article overview

Lean Working Capital Management: Embedding Best Practices for Revenue Maximization and Profit Optimization


Cotis, Lucia, Business Credit


Lean Working Capital[TM] management is the practice of applying best practices to ensure that you prevent revenue leakage, increase velocity and reduce costs. This focus is designed to increase cash flow, reduce bad debt, and decrease costs resulting in opportunities to deliver greater value to your shareholders and growth for your organization.

Many companies today are looking at the credit operation as an untapped source for revenue maximization and profit optimization. However, the lack of integrated systems, a weak infrastructure, and little standardization, along with poor online tools, all contribute to a slowdown in the cash flow process. Inefficient management of the financial operation can result in a number of deficiencies, such as high levels of bad debt expense, slow payment cycles, and poor customer service.

A more integrated approach can reduce bad debt, lower DSO and reduce operational costs. To achieve Lean Working Capital[TM], you need to improve process integrity throughout the entire treasury and credit operation with a particular focus on three key areas: Preventing Revenue Leakage, Increasing Velocity and Reducing Operational Costs.

Areas to Target for Lean Working Capita[TM]

Prevent Revenue Leakage

Leakage can occur when revenues are written-off due to old invoice problems, disputes, and sales to high-risk customers. This situation usually results from badly implemented processes. Fixing the problem includes addressing invoice issues early, expediting dispute resolution, and, identifying add correcting the root-causes of issues. Also, identifying high-risk customers up from and keeping their A/R balances low through aggressive follow-up will contribute to less bad debt and reduced requirements for bad debt reserve.

Increase Velocity

Your effectiveness as an organization is determined by the speed with which you can gather, process, disseminate and act on information. One key step is to uncover disputes sooner and resolve them faster through the use of Internet-based collaborative tools. Another key task is to ensure that you contact all past due accounts using a consistent and effective strategy. A fully integrated system allows credit staff to effectively manage their entire portfolio, and to interact with sales, customers and other departments to get issues answered quickly, so payment can be made. Providing customers with direct access to their accounts empowers them to keep their accounts current, send payment faster, improve their productivity, and to communicate easily.

Reduce Costs

Capital and people costs are two key expenses that must be controlled tightly. Having fully integrated systems makes everyone more productive, allowing you to accomplish more with less time wasted on non-value-added activities. Many tasks that require people-intervention can be automated, resulting in both timesavings and improved customer satisfaction. This means resources can be redeployed to more important work. Likewise, by speed hag up collection activities, you will reduce DSO levels, bringing more cash in-house, which results in lower financing costs.

Working with disparate systems often results in inefficiencies that cause revenue leakages, velocity roadblocks and excess costs. Introducing a single, centralized solution to manage Lean Working Capital[TM] will produce dramatic results in reduction of bad debt, increased cash flow, and lower operational costs.

The key components to focus on include Credit & Customer Selection, Invoice Delivery, Collections, Dispute Management, Online Payment Options, Customer Self-Service Account Maintenance, Cash Application, Cash Management, and Accounts Payable Management. By integrating each of these different functions, you can leverage the data gathered in each activity to reduce error, expedite processing and decrease redundancy and operational costs. Once accomplished, this integration supports the following best practices of world-class organizations. …

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