When talking about working capital, it is worth highlighting that it is made up of three main components: receivables from customers, payments to suppliers, and inventory levels of primary or finished goods.
The dynamics of these three components can vary depending on the type of business and/or industry. For instance, retail companies and others in the service-driven industry will not have the same working capital issues as an industrial manufacturing group.
For treasurers, while they may have little direct control over inventory management, they are able to directly influence receivables and payables.
Where collections are concerned, it is about establishing the right level of agreement with the customer, either through open account or letters of credit, to ensure that payment is made on time for the goods and services delivered.
A key index for collections is DSO, whereby the CFO is able to see the status of the payment terms – are they on track or behind? Minimising the DSO involves having the right controls and procedures to reduce any delays in payments and therefore, translating receivables directly into cash.
Utilising electronic collections can help reduce the float on receivables as well. Banks offer a number of solutions to improve working capital, including corporate credit cards, virtual accounts and lockboxes, all of which enhance the collection reconciliation process and identify early any late payments from customers.
On the payments side, recent surveys in Europe show that there is a significant increase in late payments from corporations, which is often not sanctioned. Some companies voluntarily delay their supplier payments to make a gain on working capital. It can be a matter of size where large players take advantage of their smaller suppliers, knowing that some SMEs cannot do without their business.
While it is good practice to minimise payment cycles to once or twice a month to optimise resources, the reduction of bank fees through automated payment method such as ACH makes it possible for companies to support their suppliers by putting in place a number of SCF programmes. These can be done through the banking partner, and suppliers can be onboarded in order to be paid earlier on their receivables and they can also get an extension on the DPO.
SCF is a key topic for treasurers in 2018. Yields on cash invested are still at low levels and treasurers realise that they can better leverage their working capital by offering financing solutions to their suppliers. Over the last few years, a number of fintech companies have emerged to connect directly suppliers with customers. These collaborative tools work by proposing dynamic discounting or by agreeing to a rate for payables based on supply and demand. This tends to be a win-win for both parties where working capital can be optimised in exchange for better returns.
With all these metrics, it then becomes essential for treasurers to use data analytics to regularly measure the value they contribute to the business and justify their importance to their senior management.