As it was shown in the first instalment, there is a true possibility of improving the return on an investment through affordable actions on the working capital, obtaining a considerable impact.
The actions to implement and the results to obtain vary depending on the investment phase on which they are carried out.
In the first instalment, some measures to implement in the pre-investment phase were shown, which were aimed at identifying improvement potential and working capital worsening risk, as well as at identifying alternative sources of financing and working capital monetization possibilities.
This second instalment analyzes the actions that can be implemented, and its impact on the investment’s profitability, once the control over the investee has been taken and the development phase has started.
Instalment II – Development Phase
This phase is aimed at increasing the investment of the management company of venture capital entities, through improvements in the business management that increase the value of the company.
Likewise, the actions implemented on the working capital during this phase, built upon a Working Capital Total Plan, are focused on developing the processes, organization and information of the investee, in order to optimize the management of its working capital, and thus, improve the three elements of the value equation: VALUE = EBITDA x multiplier + (Cash – Debt).
The application of the Working Capital Total Plan generates concrete improvements in business management that positively revert to the investee’s value:
Net cash improvement (Cash – Debt)
o Higher rhythm of cash generation: the improvement on the working capital management generates a reduction of the average maturing period, and therefore a higher rhythm of cash generation, increasing the company’s capability to fall into debt.
o Reduction of equity in the mix of financing of the investment: through the establishment of financial instruments, it is possible to monetize the working capital. Thus, the obtained cash can be used to reduce the initial contribution to equity.
EBITDA improvement
o Efficiency increase: improvements in the processes and information systems allow reducing obsolescence losses, service failures or unpaids, as well as eliminating hidden costs (e.g. setbacks, production capacity excesses, duplicate duties, manual processes).
o Higher growth capability: less need for working capital financing due to management improvements makes it possible for the company to undertake higher growth, regardless of external resources.
Multiplier improvement
o Greater security: the redefining of the processes and organization allows reaching a higher level of internal control, and therefore, assuring the information reliability and the integrity of the company’s assets.
o New model of relations among the management team: the creation of multidisciplinary groups such as permanent expert forums, increases and improves the relation among the different members of the executive team, thus generating common improvement proposals.
The launching of the Working Capital Total Plan requires a prior assessment that could have been implemented in the pre-investment phase, and that will be focused on the following aspects:
* Processes: “Supply Chain process”, “Bid to Cash process” and “Order to Pay process” analysis, paying special attention to the effect on working capital generation.
* Organization: detection of duplicated duties, incorrectly located or inadequately automatized.
* Systems: identification of failures that affect processes.
As a result of the assessment, an action plan is generated, based on the following criteria:
* Progressive change: timing changes in processes and systems with the organization rhythm, without risking the business.
* Multiplier effect: by combining marginal improvements in the different action areas, significant increases in the rhythm of cash generation can be achieved.
* Levering up the company’s teams: by raising the organization toward a common goal and achieving permanent changes.
* Quick Wins: oriented toward the action and results gaining from the beggining.
* Permanent monitoring: through a dashboard that allows tracking the plan’s progress and its results.
In conclusion, by acting on the opportunities of processes improvement, organization and previously identified information systems, it is possible to achieve limited brief-period reductions of each one of the components of the working capital. The accumulation of these simultaneous improvements involves a significant increase of the cash generation rhythm, and therefore, of the investee’s value.
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ONEtoONE Asset Management ha realizado su quinta inversión fuera de n...
