The Big Squeeze

With debt and equity markets closing for business, it's now time for CFOs to look closer to home for capital.

Launching his working capital crackdown at the tail end of 2001, the CFO assembled a steering committee that included external consultants from REL, KPN’s company secretary, the heads of corporate sales and billing, and representatives from all big business units. For the first year of the campaign the committee held weekly, 90-minute meetings, setting up a step-by-step plan to improve receivables, payables, and inventory management. By the end of 2002, the team freed up a whopping €765 million of working capital, leaving KPN with €2.8 billion of free cash flow generated after capex.

Combined with an asset disposal program, that helped push net debt down to €12.4 billion in 2002 from €15.7 billion at the end of 2001. Moody’s response in April was to upgrade KPN’s long-term debt credit rating from Baa3 to Baa2, while S&P raised KPN’s outlook from stable to positive in March this year. Henderson says he was “pleasantly surprised” by the total cash extracted. “When you start something like this you know you’re not perfect, but you have no firm idea of how much capital you can release.”

Sunken Treasures

The largest portion — €529 million — of that total was gained by attacking receivables processes. The committee began by harmonizing the billing patterns of the firm’s 8 million retail customers, who were divided into 23 billing zones around the country. Some zones were collecting monthly payments in advance, while others collected on a two-month cycle.

By year-end, those differences were history — the firm now has a standard, monthly advance-payment schedule across all zones. That means faster billing and improved account visibility.

For big corporate customers, the committee installed a disputes management database that displayed, for the first time, the amounts owed by all debtors and the reasons for each dispute. Accessible via the intranet by all registered users, and featuring key performance indicators like WART — weighted average resolve time — the system makes it easier for credit managers to home in on the largest, most stubborn non-payers, and when necessary, help calculate installment payment schedules for cash-strapped customers. The upshot, says Henderson, is that the firm could finally “get overdue debtors down, and get disputes resolved faster.”

At the same time, KPN introduced what Henderson calls a “proactive collection policy” for its top 500 customers. To facilitate payments, customers are assigned their own dedicated collection officer at KPN, who puts in a reminder call to them a week before bills are due. “It’s important that customers realize the clock is ticking,” Henderson says.

On the accounts payable side, the firm’s base of over 25,000 suppliers was reviewed to see what could be rationalized. Fewer suppliers, Henderson reasoned, would mean that there would be greater scope for standardizing and extending credit terms, and less scope for errors in the management of payments. “It’s a buyer’s market rather than a seller’s market, so we approached all our non-strategic suppliers, telling them to either accept longer payment terms, or go somewhere else,” he says. Larger suppliers were briefed on the proposed changes in person by KPN representatives, while smaller suppliers got wind of the new regime through a mailshot. The hardball approach paid off — accounts payable increased by €123 million over the year. The remainder of the working capital reduction — some €113 million — came from leaner inventories, particularly in KPN’s mobile division.


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