The Hackett Group's “2018 Working Capital Survey”reveals a massive opportunity to free up over $1.5 trillion in cashacross the United States and Europe. (See Figure 1, below.) Thisopportunity is cash tied up in receivables and payables. In theUnited States, the receivables and payables opportunities represent$334 billion and $358 billion, respectively. The opportunities inEurope are a similar size.

Accessing this cash to show a healthy balance sheet is theprimary driver for year-end gamesmanship, also known as the“dash for cash.” The result may well meet market andshareholder expectations and have a positive impact on share price.However, playing the year-end game is successful only for the shortterm.

Companies that access this cash and improve their cashconversion cycle over the long term reap greater rewards. Theyachieve sustained working capital performance and a subsequentincrease in profit. Every seven-day reduction in the cash conversioncycle yields a 1 percent improvement in margin. For a companywith EBITDA (earnings before interest, tax, depreciation, andamortization) of 5 percent, that equates to a roughly 20 percentincrease in profit.

The challenge for companies, then, is two-fold: How do werelease cash from receivables and payables? And then how do wesustain working capital at an optimal level?

Most companies invest substantially more time and effortaddressing this challenge at the end of every quarter and fiscalyear than they do during the rest of the year. Closing the books atthe end of a fiscal year is stressful, and at that point, manycompanies believe it is too late to take actions that could releasesignificant cash before closure. Instead, they resort to tacticsthat provide a temporary boost in cash. The two most popular are todelay payments to suppliers and to negotiate earlier billing orpayments with customers in exchange for discounts. Unfortunately,these moves usually come back to haunt them during the followingyear's first quarter—and the cycle repeats.

Look Beyond the Temporary Fixes

Temporary fixes may produce short-term results, but they rarelylead to sustained improvement. Think about starting a fitnessprogram. If your goal is simply to get fit for the holiday party,then how likely are you to work out regularly in the new year? Ifyour goal, however, is to adopt a healthy lifestyle, then you arethinking about how to maintain that new exercise routine on anongoing basis.

Sound working capital management is, in fact, a lot likeadopting a healthy lifestyle. It is possible to launch a short-termdash for cash that reduces working capital in the current year andsets the right foundation for keeping it off the books. The key toachieving this dual goal of quick results and ongoing improvementis to focus on high-impact activities that have a direct link tothe underlying processes at the core of working capital management.Organizing these activities in a formal dash-for-cash initiativecan help raise awareness and maintain focus on the importance ofmanaging cash across the organization.

Following are seven steps to take prior to year-end to addressimmediate needs. When approached in the right way, these steps canalso improve the underlying processes and build a sound foundationfor continuous working capital improvement.

1. Focus collections activity on the top customerinvoices due before year-end. To support long-termworking capital health: Use a segmentation exercise to tailorthe collections efforts and strategic collection techniques tocustomers' payment behaviors.

2. Identify the top supplier invoices due for paymentbefore year-end, and look for opportunities to extend paymentterms. To support long-term working capitalhealth: Review payment-term strategy with vendors, andre-negotiate or adjust terms to support cash flow and complianceneeds.

3. Target resolution efforts at the top disputedcustomer invoices. To support long-term workingcapital health: Investigate root causes of disputes andnonpayment to identify common issues that give customers an excuseto withhold payment. Often such disputes are the result ofinternally controllable factors, such as pricing and discountpolicies.

4. Review payment setup to ensure that no supplierinvoice above a predefined threshold value is paid in advance,especially if the due date is after year-end. Tosupport long-term working capital health: Review paymentroutines with the aim of eradicating early payments by implementingbest-practice techniques, such as payment runs, a payment-termsmodel, and/or a payment clock. These actions can improve both cashflow and process efficiency.

5. Ensure that year-end plans take into accountfirst-quarter needs and offer customers the option to acceptyear-end deliveries to maximize sales potential while reducingbuffer inventory. To support long-term working capitalhealth: Explore new solutions—for example, an online planningtool—for sharing information with key customers about their needs.Such systems can help improve planning and timely deliverieswithout increasing inventory levels.

6. Define practical targets for each of the actions inthe previous points, and set rewards that are clearly linked toachieving the targets. To support long-term workingcapital health: Establish a clearly defined set of operationaland management key performance indicators (KPIs) and targets linkedto corporate working capital objectives. Then identify the level ofmonthly, incremental, ongoing performance needed to meet thosegoals.

7. Measure progress of these actions using a simple setof reports that provide clear visibility of progress towardyear-end results. To support long-term working capitalhealth: Install effective reporting that monitors workingcapital performance accurately and provides management withvisibility into the effects of process changes on working capital(i.e., focused beyond year-end).

Aligning treasury, finance, accounts payable, and accountsreceivable staff around these steps will reinforce desired year-endresults, as well as provide a foundation for lasting workingcapital excellence. This approach helps encourage the right staffbehaviors, shift supplier and customer habits, and produce KPIsthat provide management with the visibility they need to manageworking capital on a continuous basis.

Set Targets to Avoid Falling Back into Old Habits

The temptation to drop the ball and resort to old ways ofworking will always be there. In fitness, converting new practicesinto a sustainable, healthy lifestyle requires teamwork,collaboration, and reasonable targets. Working capital improvementrequires the same type of steadfast resolution.

Short-term targets should be challenging but also realistic.These targets should be based on a thorough analysis of thecompany's processes and performance, and quantified opportunitiesto improve working capital to free up cash within the organization.The goal should be to make structural changes that will steadilyimprove performance over time. Once on the right track, a financeteam will find the results to be self-sustaining as the newlifestyle becomes part of the company's DNA.

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• Can a Robot Help Improve Working Capital?

It's possible to get out of the cycle of temporary fixes focusedsolely on short-term cash needs and begin building a healthierapproach to working capital management. More specifically, atreasury and finance team can begin taking actions between now andthe end of 2018 to tap into that significant working capitalopportunity and deliver tangible cash improvement.

If approached properly, these actions will not only improve thecompany's current cash position, but also establish a cash culturethat lays the foundation for continuous working capital improvementand excellence.

Liselore Kolff is aworking capital consultant with more than four years of experiencedelivering successful projects globally. Since joining The HackettGroup in 2017, she has worked on projects in the offshore,construction, pharmaceutical, biotechnology, and life scienceindustries. Her areas of expertise are supply chainmanagement, operations, and accounts receivablemanagement.  She holds master's and bachelor's degrees inindustrial engineering and management from the University ofGroningen, Netherlands, specializing in product and processtechnology.