19 Sep Turning your CFO into a Key Performance Indicator Cheerleader
We could have had some fun with the title and named it “Turning your CFO into a KPI Cheerleader by improving Working Capital Management (WCM) by Reducing Days of Sales Outstanding (DSO)”. Lots of great business words. There are many ways to turn your CFO into a KPI cheerleader, for our purposes, we will focus on a top-of-mind topic for CFOs: working capital management. The interest in this topic stems from the great recession of 2007-2009. When credit was hard to attain, CFOs looked within their accounts receivables to bolster working capital by reducing DSO thus reducing reliance on credit. Squeezing cash from your receivables becomes collaboration between financial teams and supply chain teams. Here are three items to consider when working on a DSO improvement program.
KPI Collaboration. In addition to understanding which KPIs to focus on to improve DSO, organizations need to work within a collaborative framework to have a teamwork approach to reviewing metrics. Collaboration is more than meetings, conference calls and emails. Teams need to form sub teams, temporary teams and understand story behind the numbers. Why are certain metrics at a specific level? What is causing specific issues? In addition to being late, how much does the delay cost the organization in terms of cash since such delays extent payments.
Real Time. This is where the rubber meets the road in supply chain organizations. Issues which affect DSO, which can be supply chain metrics such as adherence to plan (ATP), On-time-in-full (OTIF) and many others need to managed on a daily basis or even hourly. Fixing specific metrics 1 quarter later can help long term, but cannot help supply chain performance and resulting DSO performance in the current financial timeframe.
Indirect KPIs. By connecting financial metrics to supply chain metrics, organizations can understand the impact certain items in a supply chain can affect performance, which can affect delivery which can affect when a customer pays, which can affect your DSO. One example we have seen in food and beverage organizations is inconsistent supply – specifically, raw materials which may have small variability, requiring certain batches to spend more time within a certain phase of the manufacturing process, thus possibly affecting ship time.
Summary. Connecting KPIs to financial metrics sounds very common, but truly correlating supply chain performance metrics to working capital metrics takes more strategic planning, but the payoffs can be enormous.
The question to ask yourself:
How much cash is freed up if we reduce DSO by 1 day?