Cash & Liquidity ManagementLiquidityWays to boost working capital

Ways to boost working capital

As borrowing rates soar and new trade barriers begin to emerge, it’s getting harder and harder for treasurers to unlock cash. Nash Riggins explores the top ways corporates can find liquidity and boost working capital without taking on costly debt.

All treasurers know that cash is king – and thanks to some favourable economic conditions and historically rock-bottom interest rates, most corporates haven’t had a whole lot of trouble sourcing liquidity over the course of the last decade. Unfortunately, that easy ride has come to a screeching halt in recent months.

The US Federal Reserve, Bank of England and Bank of Canada have all started to tighten up their respective monetary policies and let borrowing rates soar, which means debt is getting way more expensive. Stack the mounting cost of borrowing with declining revenues and a steady drop in capital expenditure, and companies that are unable to unlock new sources of cash and make balance sheets start to work harder for them are inevitably going to hit major growth barriers. Fortunately, there’s a fairly simple solution that many corporates can apply in order to enhance their respective organisational cash cultures, and that’s to optimise working capital.

Working capital is essentially just a ratio that measures an organisation’s assets and liabilities, and it’s often considered the best tool with which to assess a company’s overall financial health, efficiency and investment potential. That’s also why boosting working capital is one of the quickest and cheapest wins a company could possibly achieve in order to release the funds bards require to reinvest in sustainable growth activities without squeezing cash flows too much.

According to PwC’s Annual Global Working Capital Study, if all corporates were to boost their working capital efficiency up to the level of the next performance quartile, those efficiencies would enable a worldwide cash release of €1.3 trillion – consequently helping global companies to increase their capital investment by a whopping 55%.

That might sound too good to be true at first glance, but in practice it’s actually quite straightforward. More important still, there are several tried-and-tested methods treasurers can turn to in order to optimise their own organisation’s working capital – and the bulk of those methods stem from the deployment of improved information management systems and basic supply chain finance programmes.

Supply chain finance

Supply chain finance has been around for decades. Yet it’s only over the course of the last five years or so in which supply chain finance has exploded in popularity amongst corporates all over the globe – and it’s not hard to see why.

Supply chain finance is a natural first port of call for organisations looking to optimise their working capital because it allows businesses to stretch out their payment terms to suppliers while simultaneously offering key suppliers opportunities to get paid earlier. A huge proportion of treasurers will be familiar with the most common form of supply chain finance, which is called ‘reverse factoring’.

According to PwC’s SCF Barometer, reverse factoring is by far the number one supply chain finance option preferred by treasurers, followed by dynamic discounting, collaborative logistics and inventory finance. Simply put, reverse factoring is when a corporate brings in a bank, fintech or other financial institution in order to pay that company’s invoices to various suppliers at a far faster rate than would be ordinarily feasible. This is normally done in exchange for a discount, and it subsequently and phenomenally accelerates the accounts receivable receipts for the company’s suppliers.

This model is considered an incredibly fast and low-risk way corporates can deploy to boost working capital because, above all else, reverse factoring is not some sort of loan. Reverse factoring is simply an extension of a buyer’s accounts payable, and so it’s technically not financial debt. Meanwhile, it represents a true sale of receivables for suppliers. It’s also considered a smart move in terms of risk management because reverse factoring allows companies to spread their supply chain finance programmes across more than one bank – drastically diversifying a company’s funding mix and reducing over-reliance on any one financial institution.

While PwC’s research indicates that 59% of participating companies do still prefer to maintain reverse factoring programmes by way of more traditional banking platforms, an increasingly wide range of supply chain finance providers now offer products that enable companies to enter into programmes that can be totally self-funded by a buyer, capital markets, other financial institutions or just about any combination of relevant parties imaginable.

At the moment, the average supply chain finance programme covers around 20% of overall spend, and tends to focus on a company’s biggest and most stable suppliers in order to ensure corporates are getting the best possible rates while minimising risk for the banks or financial institutions funding the programmes. Meanwhile, a typical supply chain finance programme currently caters to around 25 suppliers.

At the end of the day, supply chain finance is a no-brainer for organisations needing to optimise their working capital, as it enables them to access cash at cheap rates, enjoy predictable cash flows and improve supplier relationships – all while avoiding taking on costly debt in order to pursue business critical activities such as digital transformation, acquisition activity and the build-out of new infrastructure.

Dynamic TMS solutions

When it comes to boosting working capital, cleaning up a company’s accounts receivables will always be a quick (but incredibly impactful) win.

According to the financial services group DBS, accounts receivable performance has been drastically deteriorating across Asian markets over recent years, resulting in more than $1trn worth of “stuck” working capital that’s trapped in the finance supply chain and created a major performance risk. Meanwhile, the amount of time it’s taking companies to convert receivables into cash has shot up by around 10%.

Fortunately, a huge chunk of these accounts receivable problems can be affordably solved for by integrating more dynamic information systems.

Companies reliant upon legacy ERP or TMS solutions that are unable to support an efficient over-the-counter workflow tend to find themselves crippled by huge volumes of data requiring manual entry with time-consuming onboarding processes. In fact, according to Deloitte’s Global Corporate Treasury Survey, treasury teams are still managing over 20% of each functional area using old fashioned spreadsheets. Bearing that in mind, it’s no wonder firms are unable to deploy adequate time and resources towards chasing invoices or settling disputes in a timely manner.

By investing in a cloud-based TMS or ERP solution, companies are able to aggregate accounts receivable information across multiple sources to generate a more holistic view of cash conversion, streamline dispute resolution and risk in order to deliver improved working capital results. Meanwhile, new AI-powered solutions are able to assist financial leaders in utilising benchmark data to make better-informed procurement decisions and ask serious questions about how corporates could better source cash and enhance liquidity.

Treasurers are facing an unprecedented number of working capital challenges in 2019 – and with new regulatory hurdles and socio-political uncertainty looming on the horizon, financial leaders cannot afford to remain complacent. That’s why corporates looking for ways in which to boost working capital should definitely look into the ever-expanding range of supply chain finance opportunities and dynamic tech solutions available in order to streamline supply chains, improve supplier relationships and free up cash that can be utilised in order to insulate companies from the unknown waters ahead.

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