Overcoming the Working Capital Conundrum

Written by Karen Penney, Vice President and General Manager UK at American Express Global Corporate Payments Europe

As 2015 approaches, the economic picture continues to improve across much of the developed world. However despite this continued recovery it seems that many businesses are still plagued by cash flow issues.

The vast majority of businesses across Europe^[1] agree with the premise that cash flow continues to be a major priority, suggesting that companies are applying a steady and cautious approach to growth plans this year. While many are finding that access to credit has relaxed, there is a strong sense that this effect has yet to permeate across the entire customer supply chain; the majority of financial decision makers said they are still experiencing delays in getting paid by their customers. This can have a crippling impact on cash flow within a business and its ability to effectively juggle incoming and outgoing payments. It also makes financial forecasting a much trickier task.

Companies are now more focused than ever on identifying the potential of their unmanaged business spending and working capital has a major role to play in giving businesses an advantage. Clearly, better management of working capital can free up much-needed liquidity, which can in turn be re-invested into growth initiatives, enabling companies to benefit from the upturn in the economy. And with almost twice as many UK CFOs anticipating modest to substantial expansion this year as they did in 2013^[2], it is clear that freeing up cash for growth is becoming even more important. Here are some ways in which businesses can manage working capital more effectively.

Free up lines of credit

Karen Penney

It can be tempting to become over-reliant on the main line of credit for managing cash flow, rather than using that money to invest in other ventures. However companies can ease cash flow pressures by making simple changes to operational practices. For example, a third party payment provider can pay suppliers on a company’s behalf but does not require payment for up to 58 days. This can significantly help to improve cash flow, and in addition to bringing considerable financial benefits, can also strengthen relationships between the company and its suppliers. Although credit cards and similar solutions have traditionally been viewed as tools for indirect expenses, today they are increasingly being used to manage direct spend, such as raw materials and manufacturing costs.

Westcoast is a privately-owned UK company which has benefited from freeing up lines of credit. It distributes computer and electrical equipment to retailers and resellers and wanted to ensure that it was optimising its cash flow to avoid cash leaving the business quicker than it was going in.

The electronics and computer sector is typically risk averse, so suppliers offer short credit terms which are payable by Direct Debit. With longer payment terms for its customers than those offered by its suppliers, Westcoast was keen to ensure it could steer clear of incurring hefty rates of interest, while still meeting customer demand for stock.

By using simple electronic payment solutions Westcoast was able to pay its suppliers promptly, but not part with the cash for a further 58 days. This significant improvement has had a direct impact on future growth prospects and the improved working capital gives the company the opportunity to buy more and in turn, sell more.

Ensure greater visibility on expenses

A lack of visibility when it comes to expenditure, with unwelcome ‘surprise’ bills or unexpected expenses, makes managing cash flow a huge challenge. By doing something as simple as automating expenses, companies can gain better visibility of incoming and outgoing sums, making cash flow much easier to manage and control.

By improving visibility of outgoings, businesses can gain a better overview of all expenditure, as well as a greater understanding of potential cash pressures in the future. Expense management tools ensure that businesses can track trends, such as potential over-expenditure or excessive ordering. Having accurate information management systems and forecasting in place ultimately leads to tighter financial control resulting, hopefully, in more opportunities for investment and growth.

Travel and entertainment policies

Creating or updating travel and entertainment expenses policies allows businesses to specify preferred suppliers. This not only ensures consistency across all travel arrangements but also ensures that all costs are pre-agreed and closely monitored. Approving incurred expenses during the claims process instead of pre-approving expenditure is also a useful term to include in expense policies, to generate a sense of employee accountability and to ensure there are no unwelcome surprises.

Negotiate with suppliers

As well as giving insights to help long term forecasting, the data from expense management systems can be invaluable for managing cash flow issues in the short term by flagging any areas where costs are too high or inconsistent. This then allows companies to consolidate suppliers and puts them in a stronger position to negotiate preferential rates in the future.

Companies and their suppliers are inextricably linked, and as the global supply chain gets ever more complex, a balance must be sought for both to prosper. It is critical that companies consider their working capital options fully, looking beyond the many available levers that are detrimental to either the buyer or supplier. By taking a more strategic approach to receivables and payables companies will be in a far stronger position to free up cash for investment and gain a broader competitive advantage.

[1] 89% – According to an American Express survey of financial decision makers in 500 companies across the UK, France, Germany, Spain and the Netherlands in May 2014

[2] American Express/CFO Research Global Business and Spending Monitor, April 2014