Unlocking cash from your balance sheet - McKinsey | Pricing during inflation: Active management can preserve sustainable value - McKinsey | How capital expenditure management can drive performance - McKinsey | Using analytics to address inflation risks and strengthen competitive positioning

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Unlocking cash from your balance sheet - McKinsey & Company (Full Access)

A company’s income statement is typically the first stop for management teams seeking ways to reduce debt-to-equity ratios, improve profitability, and increase resilience. That’s for good reason: creating long-term value requires sustainable growth, as well as changes to margins and cost structure. Yet few companies give much thought to the assets and liabilities on a balance sheet that can unlock lucrative opportunities. Here are six proven strategies to consider.

Many companies treat working capital simply as the cost of doing business. In our experience, few consider the negative impact of extended customer terms, tight payment cycles, and high inventory levels on true economic value. That’s why a thorough analysis of previous years’ transactions usually reveals process gaps, unfavorable and unnecessary terms with customers and vendors, and other near-term opportunities to improve working capital.

By closing gaps caused by slow invoicing, weak collections policies, early payments to vendors, inefficient payment processes, and out-of-market terms, a company can typically reduce its cash-conversion cycle, freeing up cash to make investments, reduce debt, pay dividends, and fund mergers and acquisitions. For example, a global agricultural-products company conducted a transaction-level analysis as part of a broad effort to achieve best-in-class improvements in working capital. The results helped it design new product- and region-specific initiatives to transform its order-to-cash process, as well as various category-specific measures and process improvements to extend the procure-to-pay cycle.

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Pricing during inflation: Active management can preserve sustainable value - McKinsey & Company (Full Access)

Inflation is back. Following decades of limited cost volatility, dealing with rising inflation is now a key topic in the boardrooms of advanced-industry companies worldwide. Many organizations are struggling to adjust to this new environment because their sales teams have never had to negotiate price increases of this magnitude with their customers. They often have limited transparency into the impact of individual cost drivers on prices, making it difficult to calculate the price increases required. Moreover, today’s pricing processes and tools were not designed to handle the scope and granularity of the price increases now needed.

Today’s inflationary environment results from several specific trends, including strong demand growth in the postpandemic world as global industrial activity quickly rebounded. Supply chain constraints have resulted in the limited availability of certain materials and products and ensuing cost volatility. For example, steel prices jumped 3.6 times between the second quarters of 2020 and 2021, only to drop somewhat in the first quarter of 2022. Supply chain disruptions such as rising freight costs, lockdowns in China, and Russian supplier sanctions have also contributed to the scarcities. All these factors are boosting cost inflation for industrial players, requiring them to react.

While these trends show no signs of abating, economic concerns are growing, and companies are wondering how they should adjust their pricing to offset constant inflation without jeopardizing future revenues.

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How capital expenditure management can drive performance - McKinsey & Company (Full Access)

One of the quickest and most effective ways for organizations to preserve cash is to reexamine their capital investments. The past two years have offered a fascinating look into how different sectors have weathered the COVID-19 storm: from the necessarily capital expenditure–starved airport industry to the cresting wave of public-sector investments in renewable infrastructure and anticipation of the next mining supercycle. Indeed, companies that reduce spending on capital projects can both quickly release significant cash and increase ROIC, the most important metric of financial value creation (Exhibit 1).

This strategy is even more vital in competitive markets, where ROIC is perilously close to cost of capital. In our experience, organizations that focus on actions across the whole project life cycle, the capital project portfolio, and the necessary foundational enablers can reduce project costs and timelines by up to 30 percent to increase ROIC by 2 to 4 percent. Yet managing capital projects is complex, and many organizations struggle to extract cost savings. In addition, ill-considered cuts to key projects in a portfolio may actually jeopardize future operating performance and outcomes. This dynamic reinforces the age-old challenge for executives as they carefully allocate marginal dollars toward value creation.

Companies can improve their odds of success by focusing on areas of the project life cycle—capital strategy and portfolio optimization, project development and value improvement, and project delivery and construction—while investing in foundational enablers.

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Using analytics to address inflation risks and strengthen competitive positioning - McKinsey & Company (Full Access)

During 2021 and 2022, consumer inflation accelerated in most developed and emerging economies. In the United States, the consumer price index (CPI) rose from 2.6 percent in March 2021 to 8.5 percent in March of this year. In June, the pace reached 9.1 percent, the fastest in 40 years, while producer prices have increased faster still. In the eurozone, consumer inflation reached 8.6 percent in June 2022, its highest-ever level (exhibit).

Two line charts show the year-on-year change, by month, of the consumer price index (CPI) and the producer price index (PPI) in the United States and the eurozone from 2019 to June 2022. Both the CPI and PPI stood under 2 percent in January 2021. Since then, the CPI has risen by almost 10 percent in both the United States and the eurozone. PPI data have climbed even higher: the United States is at 16 percent and the eurozone at 37 percent.

Investors, economists, and forecasting institutions expect inflation to ease, but only gradually. (July measurements were somewhat lower in the United States but higher still in the eurozone.) The return of inflation is linked to the pandemic—the public-health measures taken to contain the spread of the virus and the economic and fiscal measures taken to mitigate the disruption this caused. The Russian invasion of Ukraine is exacerbating the inflationary dynamics.

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