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Exploring the dynamics of working capital efficiency

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The intricate balance of working capital management is a pivotal concern for treasurers worldwide, particularly in industries undergoing rapid transformation and integration.

Addressing this, the 2024 EuroFinance Global Treasury Americas West Coast conference featured in-depth discussions with treasury leaders at Viatris and Nokia, who shared their insights on optimising working capital strategies amidst the challenges of global operations and rapid sectoral evolution. 

Strategic importance of working capital management

Cash and working capital management is crucial for maintaining the operational efficiency and financial health of a company, particularly following significant corporate restructuring. During the combination that formed Viatris—a global healthcare company created in November 2020 through a combination of Mylan and Upjohn, Pfizer’s Established Medicines division—unique challenges necessitated financial strategies to safeguard liquidity and ensure fiscal stability.

Post-combination periods are critical as newly formed entities must integrate diverse commercial markets, operations, systems and processes as well as enhance financial stability. At launch, Viatris was committed to improve cash conversion and enhance its strong cash flow generation to meet its objectives, including paying down at least $6.5B of debt by year end 2023, paying quarterly dividends and creating the optionality to execute share buybacks and business development transactions while maintaining an investment grade credit rating, a key indicator of financial health that influences investor confidence and capital borrowing costs.

Arijit Dasgupta, Assistant Treasurer at Viatris, highlighted the strategic creation of a specialised team focused solely on overseeing, forecasting and optimising cash flow throughout the organisation.  Viatris Treasury led the team with full support and direction of Viatris executive management and worked with global finance colleagues and many other colleagues from Commercial, Operations and Information Technology to completely revamp the process and governance for cash flow forecasting and optimization.

The establishment of the team was directly tied to Viatris’ ability to meet significant financial targets. Viatris was able to increase accuracy and predictability in cash forecasting. 

Operationally, Viatris was able to improve its year end cash conversion cycle (on Net Sales) by 10 days between 2021 (135 days) and 2022 (125 days). 

Dasgupta elaborated on the importance of aligning internal incentives with the company’s broader financial management strategies, particularly cash management. Viatris has been able to build a cash culture throughout the entire organisation through various management oversight and focal areas, management reviews and corporate target setting. On top of that, Viatris employees’ annual and long-term incentives calculation now uses annual incentive metrics that includes a significant weighting for achievement of Free Cash Flow targets.

This has been instrumental in meeting the objectives set forth at the inception of the combination. As of Q1 2024, Viatris has paid down approximately $6.6B of debt and returned ~$2.2B to shareholders through consistent quarterly dividends and shares buybacks; as well as invest in business development activities and maintain its investment grade credit rating.

Innovative techniques and tools

Transitioning from pharmaceuticals to the high-speed realm of technology, the strategic management of working capital proves equally vital yet distinct in its execution. In the landscape of the technology industry, effective working capital management is crucial for companies to sustain operational flexibility and fuel growth. During the panel discussion, Lenny Floria, who oversees regional treasury at the Finnish IT and consumer electronics giant, Nokia, delved into the specifics of how the company has strategically evolved its financial practices to meet the challenges posed by rapid technological advancements and the capital-intensive nature of the tech industry.

Nokia has made significant strides in managing working capital by incorporating digital platforms that automate and streamline financial processes, particularly in handling receivables and payables. These digital tools are designed to facilitate quicker transaction processing, enhance accuracy, and improve visibility across financial operations. This is especially important in technology sectors where the pace of change is relentless and the ability to quickly adapt financial strategies can provide a competitive advantage.

Floria also highlighted the importance of banking partnerships, which have been crucial in developing customised financial solutions that support Nokia’s business model. These partnerships have enabled the creation of flexible financing arrangements, such as tailored credit terms and innovative funding structures, that help manage the liquidity needs inherent to tech companies.

Moreover, the treasury team’s approach to managing receivables and payables has been significantly influenced by its adoption of digital platforms. These platforms not only support day-to-day financial operations but also provide strategic insights that aid in decision-making. For instance, the use of advanced analytics on these platforms allows the treasury team to forecast cash flow more accurately, identify potential delays in payments, and optimise cash reserves based on real-time data.

The integration of technology into working capital management extends beyond automation to encompass a strategic alignment with the company’s broader financial goals. This includes ensuring that capital is available to fund research and development activities, which are critical for innovation and maintaining Nokia’s competitive edge in the marketplace.

Looking ahead, both Dasgupta and Floria are optimistic about the role of technology in further transforming working capital management. The use of artificial intelligence and machine learning to predict customer payment behaviours and optimise inventory levels was discussed as a frontier yet to be fully exploited. These technologies promise to bring about even more precise management of cash flows and working capital in the future.