Faster payments for suppliers, maximising terms for buyers: how working capital could help build growth-oriented relationships

Companies seeking to accelerate growth tend to look to outside sources for funding. Overdrafts, loans, and venture capital can be the first ports of call. But what if there were a cheaper source to be found sitting in a company’s balance sheet?

In fact, working capital is recognised as one of the lowest cost sources of capital. When unlocked it can be a legitimate source of funding for growth and securing competitive opportunities that otherwise might not have been possible. A 2016 PWC report (1) estimates that a significant £28bn in the UK could be freed up for growth (globally the figure is €1.1 trillion).

Not enough companies know how to gain that advantage. Working capital is seen as a matter of meeting liabilities when they fall due. In fact, the cash can be used to target strategic objectives, and carries implications for departments far away from finance.

Take the supply chain. A single quick payment means a counterparty can pay its own bills a little faster. Faster transactions ripple through the supply chain in a domino effect, speeding up settlements and therefore shipments.

Sales teams can leverage working capital to negotiate better payment terms. For example, discounts to fast payers can be offered, in recognition of the contribution they make to improved working capital.

The challenge is that unilateral action on working capital is rarely recommended. Moving payment terms to suit one’s own enterprise impacts on trade partners, by reducing their working capital. What is needed is a solution which helps both parties. A solution by American Express can achieve this, granting both sellers and buyers improved payment times simultaneously.

Here’s how it works. The supplier identifies key customers and arranges for them to use the American Express credit line. Upon receiving an invoice, the buyer provides approval to their supplier who then draws down the funds on their account, receiving them within five banking days. The buyer then pays American Express, in up to 55 days.(2)

The process means the supplier gets bills paid promptly. And the buyer gets an improvement to days payable, helping cash flow.

The contribution to working capital is obvious. There is also a long list secondary benefits.

Sales managers benefit from better relationships with clients. Instead of putting accounts on hold due to payment irregularities, the sales team can concentrate on driving growth or growing relationships.

The finance team is one the biggest beneficiaries. Reliance on overdrafts can be reduced. This transition to a precise payment schedule means the finance team can construct cash models to a new level of accuracy. As working capital improves, the stress of a cash crunch should recede.

The PWC report on working capital finds a correlation between slow invoice settlement and inefficient finance departments. It says, “Analysis of accounts receivables performance shows that organisations with higher days sales outstanding typically spend one and a half times as much on their accounts receivable processes, and deploy twice as many people to manage them.”(1)

The smooth processes of Working Capital Solutions can simplify receivables. This liberates the credit team to focus on other customer areas or debits.

Furthermore, there is an ethical dimension to consider. The Chartered Institute of Credit Management is promoting the Prompt Payment Code, demanding on-time resolution of liabilities. This supports a nationwide campaign by the Department for Business which warns that late payment hampers investment, harms cash flow, and in extreme cases can put businesses’ solvency at risk. WCS can play a role in conforming to the Prompt Payment Code.

The solution is versatile, capable of being tailored to the preferences of each user. For example, it can be used to maximise days payable outstanding (DPO), or only when selling to give buyers more time to pay whilst reducing days sales outstanding (DSO). WCS can be adopted in a range of ways to support your preferences. The team at American Express provide experts to implement the solution. Integration with an ERP system is possible, though entirely optional.

WCS is a debt-neutral credit source, operating independently of other financing. Many companies use WCS in parallel with bank credit and other sources of capital. It can be a complementary addition, rather than a competitor to existing facilities.

The British Chamber of Commerce quarterly economic survey reveals the economy is in a growth phase (3). A net 43 per cent of manufacturing firms and 35 per cent of service firms are confident turnover will increase in the next twelve months. Working capital could be the “missing link” for companies looking for the capital to execute a growth strategy. The right technology and solutions can direct capital to where it can work hardest.

To find out more visit www.americanexpress.com/uk/supercharge

(2)Fees apply according to the agreement terms and the number of days negotiated can vary according to the negotiations between two parties.

References:

(1) PWC Working Capital Report 2017/2018 on the largest global listed companies in the last 5 years [£28bn in the UK could be freed up for growth (globally PWC estimates the figure at euro1.1 trillion)]
http://www.pwc.com/gx/en/services/advisory/deals/business-recovery-restructuring/working-capital-opportunity.html

(3) BCC data in the final paragraph
http://www.britishchambers.org.uk/QES%20Summary%20Q4%202016.pdf