Africa, like other new markets, is a challenging and potentially volatile market with elongated supply chains and varying domestic capabilities. Investment is high-risk with little prospect of a short-term return. In such a situation, managing cash outflow is critical, and for oil and gas companies that means instilling rigid cash discipline in the business. Weak cash and working capital management can result in hemorrhaging of profits, hardly the best foundation on which to build a new enterprise and often a sign of wider systematic failings.
Cash management tends to be strongest in sectors where cash is constrained, not often a problem associated with the cash-rich oil and gas sector. However, tightening cash and working capital management can release significant value; in our work with clients we typically see the release of upward of 10 to 15 percent of the value of working capital, not by aggressively managing cash flow cycles but rather by doing the basics well and instilling a ‘cash culture’ within organisations.
We have seen many of the big players in the industry express a commitment to improving cash management, particularly to fund acquisitions in recent years. This has been echoed in our surveys of business leaders in the petrochemicals sector, who see improving cash and working capital management as critical to their pursuit of growth. This is an admirable aim and one that all oil and gas companies should emulate, particularly those thinking of entering into new markets.
Good cash management is a relatively basic question of getting the simple things right. But while such measures can improve cashflow in the short term, sustaining them and establishing a strong cash culture within a business is a far greater challenge. Even in organisations with a centralised treasury function, control often weakens as processes filter towards the outer edges of the organisation. The trick to good cash and working capital management is not the immediate change – it is about making it stick.
That is why we have developed a framework for improving cash and working capital management, one that emphasises sustainability and addresses all aspects of the business that impact cash performance. A successful cash management programme does not happen by accident. It needs the organisation as a whole to think afresh and requires a real understanding of what drives cash and in particular the working capital constraints. No one is suggesting that a business can run without appropriate levels of working capital but the key is optimising what that level is and understanding the implications of too much or indeed too little working capital.It needs leadership and rigorous implementation, and a change in behaviour at almost every level.
We believe that sustainability of good cash management depends on four ingredients:
The most successful oil and gas companies invariably have both higher performance and the lowest operating costs in the sector. They have good operating management systems that spell out the procedures to be followed and provide all the information necessary to make good decisions at all levels of the organisation. This helps build a culture of competence that maximises business performance, and in a new and difficult market, that is just what is needed.
Strong cash management begins with asking basic questions of each operating cashflow cycle as well as any other areas of the business that tie-up cash:
Purchase to pay (P2P) Despite often long and complex supply chains, oil and gas companies are often presented with opportunities to improve the efficiency of the P2P cycle. At a summary level opportunities usually fall into four categories – 1) Terms extensions; 2) Compliance to existing terms; 3) Process efficiency and 4) Tactical measures.
Forecast to deliver (F2D) A common challenge in emerging markets is establishing the right level of inventory that balances the supply chain risk. There is a tendency for oil and gas companies to base inventory levels on the possibility of a ‘force majeure’, which has the potential to stop production from upstream operations and major capital projects. Often the decision fails to take into account that others along the supply chain have made similar assumptions, which leads to a compound effect. In some cases we have seen a 50 percent excess in inventory over what we would consider sufficient levels.
Order to cash (O2C) Entering a new territory also raises questions in relation to how companies engage with their customers. It is essential that the business understands the relative credit risk of its customer base and that the order to cash cycle is optimised to reflect that understanding.
Opportunities go beyond the three core operating cycles. Businesses should be considering all other aspects of the operations that ties up cash:
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