This is how to improve working capital

Working capital is a subject that regularly passes in the business world. A lot of people know that it has an important influence on a company’s cash flow and liquidity. But they sometimes it still remain unclear how exactly to calculate working capital, what elements it consists of, what an optimal working capital is and-especially-how to improve it.

In our previous article, we already saw that Process Mining can contribute positively to the planning and execution of an organization’s finance processes in four primary areas: working capital, productivity and reporting, but certainly also governance, risk and compliance (GRC).

In this article, we identify working capital challenges and pain points. But we also show how a technology and method like Process Mining can largely solve them, both in the area of accounts receivable and accounts payable. Curious about the results? Then be sure to continue reading!

Setting working capital: the challenges

Working capital is the amount of money a company needs to meet its daily or monthly obligations. The biggest challenge many companies face is (too) much locked-up working capital. This involves a number of risks.

• The head value of working capital may decrease, for example, because inventories become unsaleable or debtors pay late.
• The items that operating capital consists of do not bring in money. Sometimes they even cost money in interest instead of generating income.
• Working capital requires funding. High working capital may make it harder for you to find funding.

Another challenge? Getting current and real-time insight into your working capital. Many companies do not have the tools and insight needed to enter critical data correctly or in a timely manner. In such a case, you quickly fall behind the times or spend a lot of time manually correcting afterwards.

Accounts receivable en accounts payable

There are two concepts and components that are key to calculate and optimize your working capital: accounts receivable and accounts payable. The first category includes the money a company must still receive for providing services or goods. Accounts payable refers to accounts still to be paid. Consider, for example, items (still unpaid) that the owner or company has purchased for business use or outstanding payments to suppliers.

A good way to find the right balance between the two to help you get and keep your working capital in order? Making sure you get paid on time yourself by getting your invoices sent out quickly. A good practice on the accounts payable side is not to pay too early, but certainly not too late either.

The Power of Process Mining

But finding the balance mentioned above requires insight into processes, workloads and bottlenecks that affect your working capital. Process Mining is a method that helps you collect the necessary insights by mapping and visualizing the process of all your business processes. With Process Mining, you walk through all the digital bread crumbs your organization and processes leave behind.

Process Mining tracks and combines so-called event logs from a large number of cases to closely map processes. For example, consider the lead time and sequence of each action or process step and the differences from the ideal process flow of accounts payable and receivable.

Process Mining and working capital

But how does Process Mining help you better use and optimize your working capital? We’ll show you by looking at what the method can do for your accounts receivable and payable.

Process Mining and accounts receivable

On the accounts receivable side, Process Mining gives you more insight into your billing processes. For example:

• Checking, analyzing and visualizing these processes step by step. This allows you to better and faster identify inefficiencies and bottlenecks within invoicing processes. For example, think about the sending dates of your invoices (maybe you are invoicing too late) or a too long process time of the different steps within the invoicing process.
• Check credit limits and correlate them to new information and changing customer and market needs. You can adjust your billing strategy based on this.
• Rank customers based on their payment behavior. This provides better cash forecasts. In addition, you can prioritize customers with a high likelihood to pay (fast and reliable payers) to keep working capital at an optimal level.

Process Mining and accounts payable

Process Mining also offers solutions in the area of accounts payable. For example, to invoice faster, you need to make sure you have the right information in a timely way. If certain critical data is not entered or supplied correctly or completely, it takes a lot of time to manually correct errors or information gaps.

Process Mining also provides insight into automation opportunities: where can you start doing it, and how much money and time will it concretely save you? By gaining detailed insight into employee workloads, for example, you can find out where efficiency problems lie or where extra attention is required. Moreover, you will then know where capacity problems arise and you can better plan for the future and predict when certain investments are needed in terms of employees or assets.

Applying Process Mining for your accounts payable helps you to, include:

• Prioritize bills and invoices based on delivery date and impact on working capital. So from now on, you pay each invoice at the right time and your working capital remains at an optimal level.
• Detect and eliminate duplicate invoices with the power of machine learning. This prevents you from mistakenly paying an invoice twice.
• Detect and resolve temporary exceptions in a process. All without human intervention and before an invoice enters your ERP system.
• In an automated way and with machine learning instead of templates extracting important data from invoices. The result? Lower processing costs per invoice while increasing accuracy.
• Get the right information in real time and report instantly. This is critical in making critical financial decisions quickly and ensuring your liquidity.

In a nutshell, Process Mining gives you insight and an overall view of your accounts receivable process. This helps you find opportunities for automation and optimization. You’ll see where delays are, how much locked in working capital remains stuck in the process and how to improve it.

How to maximize the benefits of Process Mining? Deep Value is here to help

As you can see, Process Mining is an excellent method for improving and making better use of your working capital. Do you also want to get started with Process Mining in a professional way? Then Deep Value would like to help you. We know how to use the method to improve your business processes and optimize your working capital.

Want to know more? Then feel free to contact us at +31 (0)30 209 92 70 or at info@deepvalue.nl. You can also fill out the contact form on our website.