1
00:00:05,640 --> 00:00:08,320
Speaker 1: Welcome to the Fearing Greed Business Interview. I'm Sean Alma.

2
00:00:08,560 --> 00:00:12,680
Speaker 1: For any business managing working capital is absolutely vital. Put simply,

3
00:00:12,920 --> 00:00:15,720
Speaker 1: working capital is the part of a company's trading that

4
00:00:15,840 --> 00:00:19,000
Speaker 1: hasn't yet translated into cash flow. It provides an insight

5
00:00:19,040 --> 00:00:20,720
Speaker 1: into the health of a company and the way a

6
00:00:20,880 --> 00:00:24,400
Speaker 1: business operates. Every year, the team at mcgrarnickel Advisory release

7
00:00:24,520 --> 00:00:27,920
Speaker 1: their Working Capital Report, revealing how much cash is locked

8
00:00:28,000 --> 00:00:31,120
Speaker 1: up within Australian companies and how they stack up against

9
00:00:31,160 --> 00:00:33,800
Speaker 1: the rest of the world. Jason Island and Sean Wiles,

10
00:00:33,800 --> 00:00:36,879
Speaker 1: our partners at mcgarnickel Advisory and co authors of the

11
00:00:36,960 --> 00:00:40,560
Speaker 1: twelfth annual Working Capital Report. Mcgarnichol's a great supporter of

12
00:00:40,600 --> 00:00:43,600
Speaker 1: this podcast. Jason, Sean, Welcome back to Fear and Greed.

13
00:00:43,920 --> 00:00:44,760
Speaker 2: Great to be here, Sean.

14
00:00:44,840 --> 00:00:47,800
Speaker 1: Hey Sean, Sean, I'm going to start with you. You've recently

15
00:00:47,840 --> 00:00:52,159
Speaker 1: released this twelfth edition of the mcgrar nickel Working Capital Report.

16
00:00:53,440 --> 00:00:56,960
Speaker 1: Talk us through some of the headline results, how working

17
00:00:57,000 --> 00:01:00,440
Speaker 1: capital cycles have changed in comparison to last year, and

18
00:01:00,520 --> 00:01:03,880
Speaker 1: just very quickly, how you achieve these results. Just a

19
00:01:03,880 --> 00:01:05,160
Speaker 1: few definitions for us.

20
00:01:05,760 --> 00:01:08,160
Speaker 3: Yeah, thanks, Sean. I might start there. So we look

21
00:01:08,200 --> 00:01:11,360
Speaker 3: at the length of the networking capital cycle and how

22
00:01:11,400 --> 00:01:15,120
Speaker 3: that's changed year on year, And there's three fundamental parts

23
00:01:15,120 --> 00:01:17,680
Speaker 3: to the networking capital cycle. There's the length of time

24
00:01:17,720 --> 00:01:20,679
Speaker 3: it takes companies to convert their sales into cash, so

25
00:01:20,800 --> 00:01:23,679
Speaker 3: the debt is or collection cycle. There's the amount of

26
00:01:23,680 --> 00:01:27,200
Speaker 3: inventory they hold, so the length of the inventory cycle.

27
00:01:28,000 --> 00:01:30,160
Speaker 3: And there's the length of time that they pay their

28
00:01:30,200 --> 00:01:34,679
Speaker 3: suppliers on or the payables or the creditors cycles. So

29
00:01:34,720 --> 00:01:38,720
Speaker 3: those three parts of the cycle work together and form

30
00:01:38,800 --> 00:01:41,600
Speaker 3: the networking capital cycle. So we will get working capital

31
00:01:41,600 --> 00:01:45,240
Speaker 3: performance on those metrics. And just to give you a

32
00:01:45,280 --> 00:01:49,080
Speaker 3: bit of context, this year, the report that we covered

33
00:01:49,120 --> 00:01:51,480
Speaker 3: the working capital performance of one hundred and twenty four

34
00:01:51,600 --> 00:01:54,920
Speaker 3: ASX listed companies across seven sectors. We look at sectors

35
00:01:54,960 --> 00:01:59,040
Speaker 3: like construction and retail, and food and beverage, and at

36
00:01:59,040 --> 00:02:02,160
Speaker 3: a headline level, this year, our research showed that business

37
00:02:02,240 --> 00:02:06,000
Speaker 3: leaders found it hard to manage working capital. The average

38
00:02:06,080 --> 00:02:09,440
Speaker 3: working capital load actually increased in six of the seven

39
00:02:09,480 --> 00:02:12,280
Speaker 3: sectors that we looked at, and each part of the

40
00:02:12,280 --> 00:02:15,840
Speaker 3: working capital cycle I just described got longer, and for

41
00:02:15,919 --> 00:02:20,359
Speaker 3: companies that were able to achieve revenue growth, the majority

42
00:02:20,400 --> 00:02:23,080
Speaker 3: of those companies needed more working capital or a greater

43
00:02:23,160 --> 00:02:25,480
Speaker 3: investment in working capital to deliver that growth.

44
00:02:26,120 --> 00:02:29,440
Speaker 1: Okay, Jason, the average day's working capital increase by zero

45
00:02:29,480 --> 00:02:33,000
Speaker 1: point four days, locking up an additional seven hundred and

46
00:02:33,040 --> 00:02:37,240
Speaker 1: fifty four million dollars. What does that mean and what

47
00:02:37,320 --> 00:02:40,000
Speaker 1: were some of the key drivers for this year's increase

48
00:02:40,040 --> 00:02:41,120
Speaker 1: in days working capital?

49
00:02:41,760 --> 00:02:44,360
Speaker 2: Yes, as Soon said, it's got more difficult in one

50
00:02:44,360 --> 00:02:47,080
Speaker 2: point four days doesn't sound like a lot, does it so,

51
00:02:47,440 --> 00:02:49,400
Speaker 2: And it certainly doesn't sound like a lot in the

52
00:02:49,440 --> 00:02:54,880
Speaker 2: context of the last few years since COVID in twenty nineteen,

53
00:02:54,919 --> 00:02:58,280
Speaker 2: the subsequent years that we've reported against, there's been much

54
00:02:58,320 --> 00:03:01,880
Speaker 2: more jagged movements in that networking capital. So point four

55
00:03:01,880 --> 00:03:05,960
Speaker 2: of a day seems quite small compared to say, last year,

56
00:03:06,000 --> 00:03:09,480
Speaker 2: which was almost a week. So it's quite small as

57
00:03:09,480 --> 00:03:11,640
Speaker 2: a net number. But what we always talk about, and

58
00:03:11,680 --> 00:03:15,000
Speaker 2: Sean described those three elements working capital is all about

59
00:03:15,080 --> 00:03:18,720
Speaker 2: the detail and all about the individual element. So we

60
00:03:18,760 --> 00:03:21,960
Speaker 2: actually saw the DSO or that length of time it

61
00:03:22,040 --> 00:03:25,799
Speaker 2: takes to collect from your customers increase, and that it

62
00:03:26,000 --> 00:03:28,920
Speaker 2: went up by a day. We also then saw the

63
00:03:28,960 --> 00:03:32,560
Speaker 2: average inventory holdings go up by three point one days,

64
00:03:33,000 --> 00:03:34,960
Speaker 2: and so that's quite a big increase when you think

65
00:03:34,960 --> 00:03:38,480
Speaker 2: about the value of inventory across all of those entities.

66
00:03:38,600 --> 00:03:42,320
Speaker 2: And the way that was mitigated was companies on average

67
00:03:42,360 --> 00:03:46,119
Speaker 2: paid their suppliers more slowly. That's a really an interesting

68
00:03:46,240 --> 00:03:49,200
Speaker 2: reversal of last year. When we were talking about this report.

69
00:03:49,280 --> 00:03:52,840
Speaker 2: Last year we were saying what great corporate citizens Australians

70
00:03:52,880 --> 00:03:56,040
Speaker 2: are in the corporate world, because they are even when

71
00:03:56,080 --> 00:03:58,960
Speaker 2: they collect more quickly from their customers, they're passing that

72
00:03:59,080 --> 00:04:02,440
Speaker 2: straight on and paying their supplies more quickly. This year

73
00:04:02,440 --> 00:04:04,160
Speaker 2: it's the reverse of that. It's been a little more

74
00:04:04,160 --> 00:04:07,560
Speaker 2: difficult to collect and the way that they've mitigated or

75
00:04:07,640 --> 00:04:11,320
Speaker 2: conserved cash is to pay supplies more slowly, which is

76
00:04:11,400 --> 00:04:12,600
Speaker 2: quite interesting reversal.

77
00:04:13,160 --> 00:04:17,480
Speaker 1: Yeah, I mean paying more slowly. There's no is there

78
00:04:17,520 --> 00:04:19,160
Speaker 1: some way we can put a value on whether that's

79
00:04:19,160 --> 00:04:20,640
Speaker 1: a good or a bad thing in terms of the

80
00:04:20,680 --> 00:04:22,000
Speaker 1: health of businesses.

81
00:04:22,760 --> 00:04:24,719
Speaker 2: I think what it is, it's a short term measure.

82
00:04:24,800 --> 00:04:27,080
Speaker 2: It's certainly the way when we talk about how you

83
00:04:27,120 --> 00:04:30,320
Speaker 2: impact your working capital cycle, one of the ones that's

84
00:04:30,360 --> 00:04:35,080
Speaker 2: the most immediately in your control is to stop paying

85
00:04:35,120 --> 00:04:38,599
Speaker 2: people or to pay much more slowly. But just saying

86
00:04:38,640 --> 00:04:41,120
Speaker 2: that you can tell that that's a short term measure.

87
00:04:41,600 --> 00:04:44,479
Speaker 2: So it certainly is a quick one. It certainly is

88
00:04:44,560 --> 00:04:47,280
Speaker 2: one that will conserve your cash. But it's something that

89
00:04:47,320 --> 00:04:50,039
Speaker 2: puts pressure on your supply chain. It puts pressure on

90
00:04:50,080 --> 00:04:53,080
Speaker 2: all of your relationships and when you are seeking to

91
00:04:53,560 --> 00:04:56,599
Speaker 2: strengthen relationships and what the last thing you want is

92
00:04:56,640 --> 00:04:59,440
Speaker 2: for a key supply to either leave you, not be

93
00:04:59,520 --> 00:05:02,039
Speaker 2: interested in supplying to you because you're a bad payer,

94
00:05:02,160 --> 00:05:06,039
Speaker 2: or even worse, to fail. So it's a short term measure.

95
00:05:05,920 --> 00:05:10,799
Speaker 2: We don't like seeing working capital cycles managed or cash

96
00:05:10,839 --> 00:05:14,960
Speaker 2: flow managed necessarily by paying people more slowly.

97
00:05:15,520 --> 00:05:17,760
Speaker 1: Okay, Sewan, the research focuses on the listed end of

98
00:05:17,760 --> 00:05:21,240
Speaker 1: the market, What do the findings mean for mid market

99
00:05:21,400 --> 00:05:23,040
Speaker 1: or smaller operators.

100
00:05:23,560 --> 00:05:25,720
Speaker 3: Yeah, sure, it's a question we often get asked about

101
00:05:25,720 --> 00:05:28,159
Speaker 3: our research, given that we do focus on the ASX

102
00:05:28,160 --> 00:05:32,279
Speaker 3: listed companies and the publicly available information. And Jason really

103
00:05:32,400 --> 00:05:34,720
Speaker 3: to hit the nail on the head. The paying supplies

104
00:05:34,800 --> 00:05:38,479
Speaker 3: more slowly was the key working capital management Leaver used

105
00:05:38,960 --> 00:05:41,400
Speaker 3: in twenty twenty four across our sample. And we also

106
00:05:41,520 --> 00:05:44,719
Speaker 3: know that mid market or smaller operators often form a

107
00:05:44,720 --> 00:05:47,920
Speaker 3: big part of the supply change for those larger businesses

108
00:05:47,920 --> 00:05:50,680
Speaker 3: that we research. So the reality is that it has

109
00:05:50,720 --> 00:05:53,320
Speaker 3: to land somewhere, and the impact of slower payments often

110
00:05:53,440 --> 00:05:55,680
Speaker 3: lands in the mid market and it puts pressure on

111
00:05:55,920 --> 00:05:59,159
Speaker 3: their ability then to pay their supplies, which are often

112
00:05:59,320 --> 00:06:04,000
Speaker 3: subcontractors or staff that don't typically give long terms and

113
00:06:04,040 --> 00:06:07,159
Speaker 3: can't give long terms, so there's a snowball effect there. Sean,

114
00:06:07,240 --> 00:06:09,720
Speaker 3: It's interesting that these findings have emerged at a time

115
00:06:09,800 --> 00:06:12,520
Speaker 3: when the government is putting a bit more focus on

116
00:06:12,520 --> 00:06:15,560
Speaker 3: this around the payment times reporting scheme, and it's given

117
00:06:15,600 --> 00:06:19,080
Speaker 3: the regulator over the last few months more powers to

118
00:06:19,160 --> 00:06:22,320
Speaker 3: really build on the effectiveness at that scheme in reducing

119
00:06:22,360 --> 00:06:24,760
Speaker 3: payment times to those smaller business buyers.

120
00:06:25,400 --> 00:06:33,640
Speaker 1: Stay with me, we'll be back in a minute. I'm

121
00:06:33,680 --> 00:06:39,240
Speaker 1: speaking to Jason Island and Sean Wiles from mcgrah nickel Advisory. Okay, Sean, so,

122
00:06:39,440 --> 00:06:42,880
Speaker 1: which sectors have performed well in twenty twenty four and

123
00:06:43,080 --> 00:06:46,080
Speaker 1: which sectors still have some room for improvement in terms

124
00:06:46,120 --> 00:06:49,160
Speaker 1: of managing working capital and obviously cash flow is part

125
00:06:49,160 --> 00:06:49,400
Speaker 1: of that.

126
00:06:50,000 --> 00:06:52,680
Speaker 3: There's often a few sectors that really stand out for

127
00:06:52,800 --> 00:06:55,479
Speaker 3: us as being the most working capital intensive and a

128
00:06:55,560 --> 00:06:59,600
Speaker 3: year on year they're typically building products or construction like

129
00:06:59,760 --> 00:07:03,880
Speaker 3: sets or agriculture, and the net length of those cycles

130
00:07:04,440 --> 00:07:06,960
Speaker 3: is sometimes up around three, four or five months, and

131
00:07:06,960 --> 00:07:09,560
Speaker 3: that was the case this year again twenty twenty four.

132
00:07:09,880 --> 00:07:12,600
Speaker 3: This is mainly inventry driven. Companies in those sectors hold

133
00:07:12,600 --> 00:07:15,120
Speaker 3: a lot of inventry, but as a positive for building

134
00:07:15,160 --> 00:07:17,000
Speaker 3: products this year that was one of only a few

135
00:07:17,040 --> 00:07:20,560
Speaker 3: sectors we saw that they were actually able to reduce

136
00:07:20,640 --> 00:07:23,559
Speaker 3: the average length of their collection cycles. So that means

137
00:07:23,560 --> 00:07:27,000
Speaker 3: that there was a greater focus on customer management perhaps

138
00:07:27,000 --> 00:07:30,640
Speaker 3: in those sectors. Retail was actually the sector with the

139
00:07:30,720 --> 00:07:33,920
Speaker 3: largest improvement, but to Jason's point, that was a sector

140
00:07:33,960 --> 00:07:37,160
Speaker 3: that relied on stretching supplies to achieve it. And at

141
00:07:37,160 --> 00:07:39,880
Speaker 3: the other end, transport, which is often a sector where

142
00:07:39,880 --> 00:07:42,480
Speaker 3: we don't see a heavy working capital ode a lot

143
00:07:42,520 --> 00:07:45,560
Speaker 3: of the time. It increased its days working capital, like

144
00:07:45,680 --> 00:07:48,800
Speaker 3: close to three days, but again not surprising. This is

145
00:07:48,840 --> 00:07:51,640
Speaker 3: a sector we're using supplies as a lever is difficult

146
00:07:51,840 --> 00:07:55,080
Speaker 3: given the nature of their supply. You think fuel and

147
00:07:55,120 --> 00:08:00,280
Speaker 3: subcontractors and warehousing rental. They're often again supplies that don't

148
00:08:00,320 --> 00:08:02,800
Speaker 3: give long term, so it's harder to use that as

149
00:08:02,840 --> 00:08:03,960
Speaker 3: a leaver in that sector.

150
00:08:04,800 --> 00:08:07,560
Speaker 1: Jason, how's the work and capal performance of Australian companies

151
00:08:07,600 --> 00:08:10,040
Speaker 1: stack up against the rest of the world.

152
00:08:11,960 --> 00:08:13,880
Speaker 2: I mean in Australia, I think we always try and

153
00:08:14,600 --> 00:08:17,640
Speaker 2: look to the rest of the world for best practice,

154
00:08:18,040 --> 00:08:21,560
Speaker 2: but in working capital we are in many sectors and

155
00:08:21,640 --> 00:08:24,600
Speaker 2: many businesses best practice. So if you look at those

156
00:08:24,640 --> 00:08:27,720
Speaker 2: three metrics again, how long does it take for us

157
00:08:27,800 --> 00:08:30,800
Speaker 2: to collect from our customers, Well, we were better than

158
00:08:30,880 --> 00:08:33,320
Speaker 2: the three markets we looked at. We looked at the US,

159
00:08:33,320 --> 00:08:35,599
Speaker 2: we looked at Europe, and we looked at Asia. And

160
00:08:36,040 --> 00:08:39,839
Speaker 2: on average Australian companies collect more quickly from their customers.

161
00:08:40,360 --> 00:08:43,400
Speaker 2: They also on average pay more quickly to their suppliers.

162
00:08:43,480 --> 00:08:46,000
Speaker 2: So in those sort of two areas that we look for,

163
00:08:46,280 --> 00:08:48,640
Speaker 2: which are sort of most in your control and how

164
00:08:48,720 --> 00:08:51,760
Speaker 2: you're trying to really show excellence and let cash throw

165
00:08:52,320 --> 00:08:55,960
Speaker 2: flow through your business, we're quite good. When it comes

166
00:08:56,000 --> 00:08:58,800
Speaker 2: to inventory, it's a little more difficult because we always

167
00:08:58,800 --> 00:09:01,840
Speaker 2: talk about well we're astra is situated in relation to

168
00:09:01,880 --> 00:09:05,160
Speaker 2: its suppliers is often longer, and so it's quite difficult

169
00:09:05,200 --> 00:09:08,960
Speaker 2: in Australia to manage inventory because you've got a longer

170
00:09:09,040 --> 00:09:11,800
Speaker 2: lead time and we saw that, we saw that play out.

171
00:09:11,880 --> 00:09:15,240
Speaker 2: So on average, the Australian companies hold one and a

172
00:09:15,280 --> 00:09:20,240
Speaker 2: half times more inventory than the US and in Asia.

173
00:09:20,360 --> 00:09:22,640
Speaker 2: When we look at the europe companies, there's a much

174
00:09:22,679 --> 00:09:25,560
Speaker 2: more diverse outcome there. So it looked like Australia actually

175
00:09:25,559 --> 00:09:29,959
Speaker 2: held this year at least about one time less than

176
00:09:30,040 --> 00:09:34,240
Speaker 2: the europe counterparts. So really some quite good metrics where

177
00:09:34,240 --> 00:09:37,800
Speaker 2: Australia is doing and managing working capital, well, it's managing

178
00:09:37,800 --> 00:09:41,040
Speaker 2: it really well compared to those international entities as well,

179
00:09:41,120 --> 00:09:42,200
Speaker 2: so it's a pretty good result.

180
00:09:42,600 --> 00:09:46,680
Speaker 1: So what about the inventory heavy sectors like retail? Obviously

181
00:09:46,679 --> 00:09:49,760
Speaker 1: we've had a couple of years of supply chain disruptions.

182
00:09:50,240 --> 00:09:53,640
Speaker 1: How are they performing and how should management teams continue

183
00:09:53,640 --> 00:09:57,760
Speaker 1: to navigate that whole supply chain issue, stock management, that

184
00:09:57,800 --> 00:09:59,880
Speaker 1: type of thing over the next twelve months, Given we

185
00:10:00,160 --> 00:10:02,640
Speaker 1: still have a fair bet going on, it's.

186
00:10:02,480 --> 00:10:05,240
Speaker 2: Been a really difficult period for retail. Retail has been

187
00:10:05,280 --> 00:10:08,840
Speaker 2: one of those sectors that when we had the initial

188
00:10:08,920 --> 00:10:11,920
Speaker 2: onset of COVID, there were a lot of fears about retail,

189
00:10:11,960 --> 00:10:15,120
Speaker 2: and then midway through that first few months we could

190
00:10:15,120 --> 00:10:17,920
Speaker 2: see that actually retail was the sector that by far

191
00:10:17,960 --> 00:10:20,320
Speaker 2: and away the best because it was you had people

192
00:10:20,400 --> 00:10:22,320
Speaker 2: cooped up a little bit more money in their pocket

193
00:10:22,320 --> 00:10:25,120
Speaker 2: with nothing else to do, and so shopping was something

194
00:10:25,160 --> 00:10:28,040
Speaker 2: that many people turned to. So retail has been a

195
00:10:28,080 --> 00:10:31,000
Speaker 2: really good example of how difficult it has been in

196
00:10:31,040 --> 00:10:35,080
Speaker 2: Australia to manage inventores over the last three four five years.

197
00:10:35,480 --> 00:10:39,199
Speaker 2: So we've started with they've had to contend with supply

198
00:10:39,360 --> 00:10:42,840
Speaker 2: chain disruption. So we had in the first few years

199
00:10:42,880 --> 00:10:45,679
Speaker 2: of that COVID era, we had some real sort of

200
00:10:45,840 --> 00:10:48,960
Speaker 2: a lack of reliability in terms of how long it

201
00:10:49,000 --> 00:10:51,480
Speaker 2: would take to get your supply if you wanted it.

202
00:10:51,520 --> 00:10:53,880
Speaker 2: So that was very difficult because you've got to try

203
00:10:53,920 --> 00:10:57,080
Speaker 2: and buy with enough time for the stock to be

204
00:10:57,240 --> 00:11:00,000
Speaker 2: in on your shelves, but when people want to buy,

205
00:11:00,080 --> 00:11:02,959
Speaker 2: I purchased from you, so that was very difficult. Then

206
00:11:02,960 --> 00:11:06,200
Speaker 2: we had an enormous cost in position. How much it

207
00:11:06,280 --> 00:11:10,479
Speaker 2: costs you to purchase and get your inventory to Australia

208
00:11:10,920 --> 00:11:14,840
Speaker 2: was very difficult. Transport costs and shipping costs were sometimes

209
00:11:14,880 --> 00:11:18,760
Speaker 2: twenty thirty fold, so that sometimes led you to not

210
00:11:18,840 --> 00:11:22,240
Speaker 2: only having to invest more in that inventory supply chain,

211
00:11:22,520 --> 00:11:24,600
Speaker 2: it also meant that some people thought, well, if I'm

212
00:11:24,640 --> 00:11:26,839
Speaker 2: going to get a shipment, I might as well buy

213
00:11:26,840 --> 00:11:29,720
Speaker 2: a little more sometimes so that I can lower the

214
00:11:29,720 --> 00:11:32,560
Speaker 2: average transport costs. So it's been a very difficult period.

215
00:11:32,559 --> 00:11:37,040
Speaker 2: Then you've had very variable demand, so it's been a

216
00:11:37,080 --> 00:11:40,280
Speaker 2: really difficult period. So we're not surprised that over the

217
00:11:40,280 --> 00:11:44,000
Speaker 2: course of this last twelve months we've seen inventories drift

218
00:11:44,160 --> 00:11:47,680
Speaker 2: up again because it's just been very difficult to work

219
00:11:47,720 --> 00:11:51,280
Speaker 2: out where demand is. We've continued to see a period

220
00:11:51,320 --> 00:11:55,120
Speaker 2: of consumer sentiment that's quite negative and that impacts so

221
00:11:55,240 --> 00:11:59,720
Speaker 2: many other sectors, but consumers have been resilient in actually

222
00:11:59,720 --> 00:12:02,719
Speaker 2: what they are spending. So people trying to manage their

223
00:12:02,760 --> 00:12:08,080
Speaker 2: working capital cycle and that inventory timeframes and that regularity

224
00:12:08,160 --> 00:12:12,240
Speaker 2: of new stop arriving, it's been incredibly difficult. I think

225
00:12:12,240 --> 00:12:14,880
Speaker 2: that'll continue over the next year as we move into

226
00:12:14,960 --> 00:12:19,240
Speaker 2: a period of hopefully some more positive consumer sentiment, and

227
00:12:19,320 --> 00:12:23,600
Speaker 2: so those businesses that rely on that will really need

228
00:12:23,640 --> 00:12:26,360
Speaker 2: to make sure they've tightened up their supply chain in

229
00:12:26,400 --> 00:12:27,280
Speaker 2: the next four months.

230
00:12:27,600 --> 00:12:30,520
Speaker 1: Okay, So, Sean, given what Jason has just said, where

231
00:12:30,520 --> 00:12:34,640
Speaker 1: we are now, how should businesses approach cash flow forecasting?

232
00:12:35,880 --> 00:12:38,480
Speaker 3: Again, it's a really good question, Sean. We see an

233
00:12:38,520 --> 00:12:42,280
Speaker 3: intrinsic link between working capital and cash flow, and cashflow

234
00:12:42,360 --> 00:12:45,920
Speaker 3: forecasting it's critical for businesses, whether there arege or small.

235
00:12:46,800 --> 00:12:49,800
Speaker 3: In the current environment, what I'd call out is the

236
00:12:49,800 --> 00:12:53,520
Speaker 3: importance of short term forecasting, typically set up over a

237
00:12:53,559 --> 00:12:57,320
Speaker 3: thirteen week rolling basis to capture what would be a

238
00:12:57,320 --> 00:13:01,240
Speaker 3: full working capital cycle for most organizations. And we think

239
00:13:01,320 --> 00:13:04,280
Speaker 3: forecasting in this way helps do a few things. It

240
00:13:04,400 --> 00:13:07,520
Speaker 3: shows the real cash runway for a business, so how

241
00:13:07,559 --> 00:13:09,440
Speaker 3: much cash have I got? How long is it going

242
00:13:09,520 --> 00:13:12,880
Speaker 3: to ask if I keep trading the way I'm currently trading.

243
00:13:13,280 --> 00:13:16,040
Speaker 3: It also works out any immediate funding needs which are

244
00:13:16,040 --> 00:13:19,559
Speaker 3: becoming really important for business, and we're seeing some level

245
00:13:19,559 --> 00:13:22,680
Speaker 3: of reemergence of working capital type finance as well, so

246
00:13:22,720 --> 00:13:26,079
Speaker 3: it can really help in that regard, and if done properly,

247
00:13:26,120 --> 00:13:30,080
Speaker 3: we think short term forecasting is a useful tool to

248
00:13:30,160 --> 00:13:33,480
Speaker 3: really test the length of the working capital cycle and

249
00:13:33,520 --> 00:13:36,439
Speaker 3: how that cycle compares to the terms that have been

250
00:13:36,480 --> 00:13:40,480
Speaker 3: agreed by companies with their spies and their customers. So

251
00:13:41,080 --> 00:13:44,160
Speaker 3: really a critical part of working capital management, and Jason

252
00:13:44,160 --> 00:13:47,120
Speaker 3: and I think it's really the starting point for good,

253
00:13:47,400 --> 00:13:49,520
Speaker 3: strong working capital management overall.

254
00:13:50,360 --> 00:13:53,560
Speaker 1: Jason Wrapping it up, what's your advice to business and

255
00:13:53,600 --> 00:13:57,240
Speaker 1: finance leaders for achieving best practice when it comes to

256
00:13:57,320 --> 00:13:58,520
Speaker 1: working capital management.

257
00:14:00,000 --> 00:14:02,840
Speaker 2: Every year when we do this piece of work shown

258
00:14:03,679 --> 00:14:06,760
Speaker 2: so we are surprised by the figures and you can

259
00:14:06,880 --> 00:14:09,880
Speaker 2: and we're not really you can see there's something happening

260
00:14:09,880 --> 00:14:12,680
Speaker 2: in the market. It does impact working capital cycles and

261
00:14:12,720 --> 00:14:15,360
Speaker 2: it usually plays out in this in this number. What

262
00:14:15,400 --> 00:14:18,640
Speaker 2: we are surprised every year is the disparity between the

263
00:14:18,640 --> 00:14:22,520
Speaker 2: best and the worst. It's amazing that within sectors there's

264
00:14:22,520 --> 00:14:27,800
Speaker 2: often one hundred days, sometimes more one hundred days difference

265
00:14:27,840 --> 00:14:31,560
Speaker 2: between the tightest working capital cycle and the longest. And

266
00:14:31,680 --> 00:14:35,200
Speaker 2: that is surprising, and that is just such a comparative

267
00:14:35,400 --> 00:14:39,040
Speaker 2: advantage that you can achieve over your the rest of

268
00:14:39,040 --> 00:14:42,280
Speaker 2: your sector and just your business. And it goes to

269
00:14:42,320 --> 00:14:46,000
Speaker 2: business help and how do you do it? It's not easy,

270
00:14:46,160 --> 00:14:49,280
Speaker 2: but it takes sustained improvement. We also see a lot

271
00:14:49,320 --> 00:14:53,120
Speaker 2: of businesses try and manage working capital around reporting periods,

272
00:14:53,480 --> 00:14:56,800
Speaker 2: So try and hold back payments or collect payments and

273
00:14:56,840 --> 00:14:58,640
Speaker 2: do it once a year or twice a year around

274
00:14:58,720 --> 00:15:03,520
Speaker 2: reporting period. Often doesn't work because it places strain on

275
00:15:04,040 --> 00:15:08,840
Speaker 2: people and relationships. What does work is a framework of

276
00:15:10,040 --> 00:15:13,800
Speaker 2: sustained improvement over a period of time, and that takes

277
00:15:13,840 --> 00:15:17,280
Speaker 2: a process. We often say, map that process. What is

278
00:15:17,320 --> 00:15:20,800
Speaker 2: your working capital cycle for each of those elements? Map

279
00:15:20,880 --> 00:15:24,360
Speaker 2: that and put together a procedure for improvement of each

280
00:15:24,400 --> 00:15:27,040
Speaker 2: of those elements. How long does it take us to bill?

281
00:15:27,360 --> 00:15:30,080
Speaker 2: Who does the billing? What do we do about collections?

282
00:15:30,360 --> 00:15:33,400
Speaker 2: Who does the ordering? How is that ordering linked to

283
00:15:33,440 --> 00:15:37,240
Speaker 2: the sales process? What are our relationships with our suppliers?

284
00:15:37,320 --> 00:15:39,680
Speaker 2: What levers do we have? All of those should be

285
00:15:39,680 --> 00:15:42,560
Speaker 2: written down in a PROCEDUREUS manual, like most other things

286
00:15:42,560 --> 00:15:47,080
Speaker 2: are in a professional business, and then assign responsibilities to

287
00:15:47,120 --> 00:15:50,000
Speaker 2: that so that people know what their part is to

288
00:15:50,040 --> 00:15:53,680
Speaker 2: play in that. If you get that right, this just works.

289
00:15:53,520 --> 00:15:57,160
Speaker 2: It does improve. What we've seen is almost all of

290
00:15:57,200 --> 00:15:59,800
Speaker 2: the research we've done for twelve years. When we look

291
00:15:59,840 --> 00:16:01,760
Speaker 2: at the best performers and you look in there on

292
00:16:01,880 --> 00:16:05,400
Speaker 2: your reports, the CFO or the CEO or the board

293
00:16:05,440 --> 00:16:07,280
Speaker 2: members that are commenting on what they've done in that

294
00:16:07,400 --> 00:16:10,320
Speaker 2: year will say, we focused on it, and we focused

295
00:16:10,360 --> 00:16:12,160
Speaker 2: on it over a period of time. And the final

296
00:16:12,200 --> 00:16:16,160
Speaker 2: thing I would do is track it. Have some KPIs

297
00:16:16,520 --> 00:16:19,760
Speaker 2: and track it so that you make working capital as

298
00:16:19,920 --> 00:16:22,560
Speaker 2: visible as the other metrics in your business. It should

299
00:16:22,640 --> 00:16:25,240
Speaker 2: be one of the main metrics in your business because

300
00:16:25,240 --> 00:16:29,520
Speaker 2: it impacts how quickly your profit becomes cash, and who

301
00:16:29,560 --> 00:16:32,320
Speaker 2: wouldn't want that to be as fast as it can be.

302
00:16:33,040 --> 00:16:34,960
Speaker 1: Jason Shawan, thanks for talking Fear and Greed.

303
00:16:35,400 --> 00:16:36,680
Speaker 3: Thanks Sean, Thanks Sean.

304
00:16:37,200 --> 00:16:40,840
Speaker 1: As Jason Island and Sean Wild's partners at mcgran Nical Advisory,

305
00:16:40,840 --> 00:16:43,480
Speaker 1: which is a great supporter of this podcast. This is

306
00:16:43,480 --> 00:16:46,040
Speaker 1: the Fear and Greed Business Interview. Join us every morning

307
00:16:46,040 --> 00:16:48,080
Speaker 1: for the full episode of Fear and Greed Daily business

308
00:16:48,120 --> 00:16:50,840
Speaker 1: years for people who make their own decisions. I'm Sean Elmer.

309
00:16:51,280 --> 00:16:56,840
Speaker 1: Enjoy your day.