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Making your capital work

Martin Babilas, CFO of Altana, on achieving and sustaining working capital improvements

When the world plunged into financial crisis, many finance directors suddenly faced the challenge of their career. Even in healthy sectors cash began to dwindle. Unsurprisingly, most FDs emerged from the crisis with a renewed respect for the importance of good cash flow management.

For Martin Babilas, CFO of German chemicals company Altana, improvements to his company’s sustainable working capital position had already taken place. However, this was not as a result of any prescient knowledge of the financial crisis and resulting recession, which hit the chemicals industry with the double-whammy of reduced demand and a lack of access to credit.

Like many of its peers, Altana suffered under the burden of the global financial downturn as sales and earnings declined. But an overhaul of the company’s working capital programme, prompted by a shift in company direction in 2007, put Altana in a strong position to ride out the crisis.

“Even in a situation like 2009, when the business was coming under pressure from the crisis, we were able to maintain a healthy margin of about 17 percent,” Babilas tells Financial Director.

“We went into the crisis with a pretty stable set up. We had a good credit line with a good credit facility that give us more secure funds than we needed.”

Babilas says that the need to achieve and sustain improvements to the company’s working capital position was largely driven by Altana’s transformation from a pharmaceutical/chemical hybrid into a speciality chemicals company in 2007.

In January 2007, Altana completed the €4.5bn sale of its entire pharmaceuticals business to Danish firm Nycomed because of slow business, high development costs and an inability to compete in the worldwide pharmaceutical market.

The sale left Altana’s sole focus on speciality chemicals business – single chemical substances that are commercially produced with chemical reactions into highly specialised applications. According to Babilas, this meant a major rethink of the company’s working capital structure was required as the change left the company’s balance sheet with a net debt position.

“We had a challenge with regard to our working capital. We not only changed the core business, we changed the balance sheet,” he says.



At the same time as leaving Altana with a balance sheet structure that had a net debt position, the 2007 sale also left the company with working capital levels that were rather high compared with its industry peers.

To execute the company’s growth strategy, Altana had to focus much more on cash generation by reducing costs and ramping up cash flow to put the business in a financial position where it could carry out acquisitions.

“You have to have clear vision of what you want to achieve. Our key vision was to free up financial resources to execute our growth strategy,” Babilas says. “The first part of the change management process was about our ability to pursue our growth strategy, to give us cash to make acquisitions and invest.”

In the summer of 2008, the group embarked on a detailed benchmarking exercise with the help of working capital management provider REL in the summer of 2008, which revealed a company structure that was composed of lots of individual parts.

Babilas says it was important that the results were shared with Altana’s management worldwide to put working capital at the top of the agenda.

“Working capital is a primary example of the fact that if you really want to improve cash culture it’s not something the finance function can do alone,” Babilas says. “All parts of the organisation must make sure they are managing cash flow in a sustainable way. We made the need to get personally involved very clear. Each entity had deadlines and milestones that needed to be achieved.”

The next stage was for the finance function to develop an action plan for each of the group’s divisions, Babilas says. Because of the decentralised organisation structure of Altana, Babilas says different ways of implementing the approach were required for the different divisions.

For the two largest group entities, Altana conducted large-scale improvement projects in the area of DSO [days sales outstanding] and DPO [days payable outstanding]. For one division with significant inventory levels, a global project was established to optimise the supply chain.

You cannot manage what you do not measure, and cash management is no exception. Often, companies lose opportunities to handle their cash more efficiently because they do not have the right systems in place to track their internal and external cashflows with sufficient detail to manage it.

To monitor the success of Altana’s initiatives, monthly reporting for all group entities was established. Babilas adds that Altana also introduced daily working capital as a driver for annual bonuses based on company and personal performance.

“We had to come up with improved potential based on that plan,” Babilas says. “Motivation was important. An important factor to motivate people is to give them the means to measure their performance. We implemented detailed reporting systems across the company.”

A future that looks bright and certain can suddenly depend on the actions of a few crucial moments. No matter how strong the brand, how reliable the customers, or how good the product, a prolonged cash crisis can dash all that potential. In certain extreme situations, the absence of good cash management can make all the company’s other assets nearly worthless.

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