´Time is money´, or rather ´timing is money´ when it comes to modern supply chains. The time difference between when a company receives cash and when cash is distributed determines how much money that company has at its disposal at any point in time – or whether it needs additional sources of financing. In the face of rapidly changing business models and digital disruption, cash and working capital management strategies have become increasingly important to ensure the financial health of companies.
Whether to fund digital transformation, mergers and acquisitions, research and development, or to meet shareholder dividends expectations, companies are finding themselves in ever greater need of cash. There are many different reasons why a company may need cash, but a well thought out working capital management strategy is key to achieving each of these objectives. Working capital no longer just presents a value creation opportunity in ´business as usual´ circumstances.
Working capital is the difference between a company’s unpaid bills (accounts receivable) and inventories of raw materials and finished goods, and its value of purchases from suppliers who are yet to be paid (accounts payable). It’s a measure of a company’s short-term financial health and operational efficiency. Cash tied up in sales on credit or inventory will increase the working capital requirements of a business. By similar logic, quicker collections of receivables and slower payment of suppliers will reduce working capital needs, freeing up more cash. According to the PWC´s Working Capital Report 2019/2020, there is an excess of €1.2 trillion working capital tied up on global balance sheets.
Companies have long used payment terms as a way to unlock cash. While successful at generating free cash flow, it can have disastrous effects on supply chains. Push payment terms too far and supplier failure becomes an all too often occurrence.
Ensuring the financial sustainability of the supply chain has become the top priority of many large companies. Anything that can be done to help suppliers get through liquidity issues makes corporate´s business more stable and their supply chain more robust.
Digital supply chain finance (SCF) solutions, like Finvex, help to ´neutralise´ the impact of extended payment terms. Because the large corporate is typically able to establish a supply chain finance program at a lower cost than the supplier is able to get itself, the overall financing cost across the supply chain is reduced. Buying organisations create real value across the supply chain by leveraging their credit profile as a means to finance their suppliers. By giving suppliers access to affordable funding, their costs reduce, and if their costs reduce the buyer´s pricing should come down. Cost savings means higher profit margins and improved capital efficiency. And let’s not forget the potential to free up more funds. It’s the beauty of SCF programs- everyone wins.
Looking at an example of the power of term extension, Procter and Gamble (P&G) successfully used SCF to increase its payment terms from 75 to 108 days over a period of 5 years. The program provided P&G with a cash flow benefit of $5 billion over this period.
While SCF can be an effective tool to free up funds, it is important for companies to be clear about their objectives. What a business wants to achieve might not necessarily center around cash. Whether trying to reduce supply chain failure risk, replace expensive bank finance with cheaper funding, or diversify funding sources, there are a range of possible strategic objectives.
Contact us today to discuss your business objectives and see how Finvex can help you create value through working capital management.