Making working capital work harder

In 2008, Bayer was a global giant with 108,000 employees in 300 subsidiaries – and a working capital problem to match. Between 2007 and 2008, net cash flow had slumped by 15 percent from €4.28 billion (£3.80 billion) to €3.61bn. Net debt had jumped 16 percent to €14.15bn.

Capital markets were getting jumpy about the deteriorating position. So was Bayer management. The company, which has large businesses in health care, crop science and material science, was, rightly, jealously protective of its A-level credit rating. If net debt continued to deteriorate, that would be under threat.

Besides, as Dr Rainer Schwarz, head of corporate controlling at Bayer AG, notes, rising debt would constrain the company’s growth. There simply wouldn’t be capital available to invest in important new projects.

“We wanted to grow the business, so managing the necessary working capital more effectively was very important,” he says. And we needed to take an approach that would be able to deliver a sustainable improvement in working capital,” explains Schwarz.

So early in 2008, Bayer made a bold undertaking: it would seek to reduce its net debt towards €10bn by the end of 2009. And as part of that, Bayer wanted to improve working capital by €1.6bn. These were big numbers, even for a company of Bayer’s scale and reach.

Communicating for involvement

The only way to achieve a big improvement in a short space of time – and sustain it - was to involve managers across the company in the working capital initiative. But that posed a problem.

“When we started this project, one of the key challenges was to make other people in Bayer realise why working capital is so important,” says Schwarz. “Our company has never been short of cash or funds. So developing a working capital culture in the sense of ‘providing co-funding for growth’ was important to the success of the project.”

To ram home the point that improving working capital was important – and that it was everybody’s business - the initiative won support right from the top.

Schwarz says: “Both our CEO and CFO made a strong commitment to the working capital project, which was essential to its success.”

Schwarz and his team established a global project office which focused on three key work streams – improving working capital from payables, receivables and inventories. Each of these work streams was cascaded down through Bayer’s three main businesses – health care, crop science and material science. These businesses delegated the work down to managers in their subsidiaries around the world.

Coordinated success

In order to spread best practice, the project team developed a 200-page book: a masterwork on how to improve trade working capital. The central project office worked on target setting and progress monitoring.
Within each country, working capital initiatives were led by a senior Bayer manager who co-ordinated activities designed to reach individual country goals. And, as Schwarz explains, country culture was a factor which the project team had to consider.

“We’re a global company so it was important to take account of how business culture varies in different parts of the world. In the US, for example, there’s a strong awareness for cash whereas there isn’t such a strong cash mindset in Japan, where cost of capital is very low. When it comes to cash management, Europe is somewhere between the two, but it depends very much on the individual country,” he explains.

Investing trust

The aim was to get managers everywhere to focus on what they could influence to improve working capital. For some, that meant finding ways to collect cash faster from accounts receivables. For others, it involved identifying slow-moving product lines, where stock could be reduced or eliminated. For yet others, there was a myriad of possibilities. The key to the project’s success was that managers were encouraged to do what they could achieve – rather than being given a proscriptive list of difficult or impossible tasks.