Better Balancing of Risks and Opportunities

By Terence Leung

A recent McKinsey article speaks of the everyday challenge of controlling working capital: “A thousand

Balanced Pepples at the Baltic Sea of Germany

everyday decisions can dramatically increase the cash needed to run a large business”. It seems that even though working capital is a priority to many companies (as discussed in my recent article at Finance Executives International), and has been so for a long while, there still is a lot of room for Finance and Operations to improve on. A key hurdle is the lack of transparency regarding the existing risks and potentials.

Efforts to improve working capital can cut into “quality, fulfillment, or speed”, as mentioned by McKinsey. Stubbornly high DIO is a great example, as there can be “buffers at every level” and “hyperconservatism often reigns”. There are many other negative day-to-day examples of “responsibility being spread unevenly across” silos in “finance, operations, supply chain, marketing and sales, and procurement”, like: issuing an invoice unnecessarily late and missing the customer’s monthly deadline; having an excessively high DIO or dealing with even more complicated trade-offs.

Continuing the ideas from the last blog, it is desirable not only to report the up-to-date status of performance indicators such as DIO, but also to understand what methods exist to optimize them and what the risks are. Through tight integrations, Pathlock Technologies’ solutions enable 360-degree transactional visibility. Its Balance Sheet of the Future^TM leverages predictive performance and risk analytics, first of all, to identify all the drivers of any performance metric. The insights enable a company to see the potentials, risks as well as their financial impact clearly. Then, a flexible and holistic ‘what if’ scenario analysis enables us to understand the outcome prior to its real world occurrence.

Now imagine: This can be applied to risk appetite as well as optimization of potentials. Therefore we can learn about the monetary, performance, and risk implications before the fact. This enables Finance and Operations executives to make fact-based decisions and avoid risk, instead of making decisions by intuition and ‘hyperconservatism’.

The inadequate access to data is the usual limitation to holistically understand a situation. But as modern Enterprise Resource Planning and other systems cover almost all aspects of a company’s operational business, the Balance Sheet of the Future^TM can therefore tap into this wealth of information for optimizing and risk proofing, not only for process performance and working capital, but also for other key areas such as sales velocity, customer services, quality, cost of materials purchased and prices of materials sold. The insights are highly specific, based on a company’s data across silos.

The breakthrough comes from:

1. Accessibility of all transactions, throughout the value chain and across operational or organizational silos.
2. Introduction of risk measurements (Key Risk Indicators or KRIs).
3. Powerful predictive what-if scenarios.

In additional, through the automatic discovery process inherent in the Balance Sheet of the Future^TM, business users can:

• Gain unparalleled transparency on performance indicators and their drivers.
• Predict risk and opportunity implications via what-if scenario analysis.

In order to act upon the insights, users can subsequently monitors the risk and performance indicators automatically in the transactions systems. This is of great help, especially if a company is going through Finance or Digital Transformations where it needs up-to-date data and insights for course adjustments and momentum generation. Please share your experience in improving working capital and the journey that you have gone through by commenting.

A note about the author: At Pathlock Technologies, Terence Leung conceptualizes and manages analytical solutions for Finance, which serves the increasing needs of the Office of the CFO on strategic decision-making critical to processes, operations and transformations. He was previously at Deloitte Consulting’s Finance, Operations and Strategy practice and at solution providers including i2 Technologies (now part of JDA) that optimize company performance and processes. Terence really enjoys interacting with industry practitioners on topics such as business value of technology, business models, and especially analytics.