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Working Capital Management: Consistency is Key

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Daniel-Windhaus

Author: Daniel Windaus, Head of UK & D/A/CH, REL, a division of The Hackett Group, Inc

Many companies are failing to sustain the improvements to working capital performance made during the recession. Daniel Windaus, Head of UK & D/A/CH at REL, a division of The Hackett Group, Inc, argues that consistency is essential to effective working capital management and global business performance optimisationDaniel-Windhaus

What’s the biggest issue when it comes to working capital? Despite the fact that companies typically take too long to collect payment from customers, pay suppliers more quickly than they should and hold far too much inventory, the underlying problem is much simpler – consistency.

Most business leaders understand that the key to working capital management is optimisation, not simply reduction. The right level of working capital should be defined by the business’s service delivery model. Customers must be satisfied, suppliers must stay in business and inventory must be available to satisfy orders and forecasts.

But at many companies, the attitude and approach towards working capital can swing wildly from year to year, or even from quarter to quarter. Companies often allow working capital to inflate while they focus on cost or service drivers. Then the pendulum swings back, driven by changes in the economy, the prevailing business environment or the end of the fiscal year. Suddenly cash becomes the priority, and companies begin to squeeze working capital for all it’s worth, usually focusing on quick fixes rather than making changes that will result in sustained improvements. Eventually, the status quo returns and working capital retreats into the background while simultaneously inflating again.

This lack of consistency would clearly be unacceptable for most companies when managing costs and service, but too often it’s the standard operating procedure for working capital. Few companies are able to optimise the cash variable or adjust their cost, service or cash balance easily without a major company initiative or project. The normal day-to-day functions are not usually able to self-adjust without some strong external force.

This is the narrative that supply chain management (SCM) firms often hear from numerous clients, and one that is confirmed by REL’s annual working capital survey of Europe’s 1,000 largest listed groups by sales (the REL 1,000). This continues to highlight, year after year, the inconsistent working capital performance by many companies across multiple industries. A separate survey of the 1,000 largest public companies in the US tells a similar story.

The recession was a driver for improvements, with the survey finding that since 2005 the constituent companies have improved their efficiency in converting working capital into revenue. However, most recently there are clear signs that their ability to maintain this improvement is faltering as companies revert back to normal habits.

In Europe, the REL 1000’s analysis of performance in key areas, including receivables, payables, inventory, debt, and cash on hand, shows that while these companies improved performance marginally in 2011, they still have about €886 billion in excess working capital. This equates to about 9.4 per cent of EU GDP.

REL’s research also reveals that companies are turning away from the strategy of hoarding cash – a practice that emerged at the start of the 2008/2009 recession, and peaked in 2012 – and are increasing investment in anticipation of growth and reducing cash on hand. However, they are continuing to take advantage of low-cost loans, with the analysis highlighting an increase in debt levels.

Despite some minimal improvement in working capital performance, we haven’t seen any indication that companies can actually generate sustainable improvement in the key areas of receivables, payables, and inventory – 69 per cent have not been able to maintain their working capital performance over a three-year period, without deteriorating by more than 5 per cent.
With capital expenditure increasing we’re reaching a real danger point. Due to low interest rates we’re going back to financing working capital which means taking on more debt, more leverage and the whole cycle repeats itself.
Clearly striking and maintaining the correct mathematical balance between cost/service and cash is easier said than done.

The globalisation challenge
The global nature of business only accentuates the problem. It’s hard enough for a national business or division to manage working capital with people centred in one place and operating in one language, with a single cultural background. But when you add in the dimension of globalisation, with shared services, centralised manufacturing plants, corporate purchasing objectives, local customer priorities and managers based in an array of countries – each with its own distinctive language, background and business norms – the challenge is simply too much to be effectively dealt with on a project or tactical basis.

If companies truly want to achieve optimised global performance of the supply chain/service delivery model and the associated cost, service and cash equation, then a sustained, consistent and structured effort needs to be implemented. This ensure that functional alignment around the working capital policies is in place and there is proper measurement of the relevant trade-offs.

Best practice tools and techniques must be employed to ensure that science, rather than experience, drives these parameters and the resulting performance levels. Plans need to be made and followed. Procedures need to be changed and then enforced. Cultural language obstacles need to be treated empathetically. Incentives should reflect business priorities only. Senior management must step up to the plate and let their staff know that working capital is a priority. All staff, including those at middle and more junior levels, should understand their roles and responsibilities in supporting working capital optimisation goals.

When it comes to optimising global business performance the devil is in the detail as it relates to thousands of customer orders, stock-keeping units (SKUs) and suppliers. But it’s still consistency that counts, and only a concerted effort by all staff throughout the organisation can make it happen.

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About Daniel Windaus
Daniel Windaus heads the REL Practice in the UK and the DACH region. He is also responsible for Private Equity clients in Europe. Daniel has extensive consulting and restructuring experience across Europe and the United States, advising both equity holders and company management on improving cash flow and working capital.

He has led successful implementation teams in complex assignments within various sectors – telecommunication, technology, utilities, manufacturing, pharmaceutical, engineering, construction and chemical.

Prior to joining REL Daniel worked in operational turnarounds focusing on improving cash flow and cost structures for companies in financial distress

About REL
REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT), is a world-leading consulting firm dedicated to delivering sustainable cash flow improvement from working capital and across business operations. REL’s tailored working capital management solutions balance client trade-offs between working capital, operating costs, service performance and risk. REL’s expertise has helped clients free up billions of dollars in cash, creating the financial freedom to fund acquisitions, product development, debt reduction and share buy-back programs. In-depth process expertise, analytical rigor and collaborative client relationships enable REL to deliver an exceptional return on investment in a short timeframe. REL has delivered work in over 60 countries for Fortune 500 and global Fortune 500 companies.

 

 

Finance

Data Unions, fisherfolk and DeFi

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Data Unions, fisherfolk and DeFi 1

By Ruby Short, Streamr

In the fintech world it seems every month there’s a new trend or terminology to get acquainted with. From just learning about cryptocurrency a few years ago, to the crazy boom markets of 2017-18, the market has now moved on to DeFi, or Decentralised Finance to those less in the know.

It’s a trend which is gathering momentum, too – $275m of crypto collateral was invested in the DeFi economy in early 2019, but by February of this year it hit $1 billion, and by the end of July this number had risen to $4 billion.

According to crypto exchange Binance, DeFi refers to “a movement that aims to create an open-source, permissionless and transparent financial service ecosystem that is available to everyone and operates without any central authority.” Essentially it gives full asset control to those who use it, whether this is through peer-to-peer models or DeFi applications.

These apps, known as DApps, run on a blockchain network meaning they’re not controlled by a single authority. And as they are also Open Source, they are publicly available – characteristics that make transactions quicker, more affordable and more efficient than their centralised counterparts, where data is stored on servers managed by one authority (think traditional banks).

So why is DeFi getting so much attention?

DeFi is exciting for many because it gives more people more control over their money. Where much of the financial sector is traditionally centralised it inherits bias, thus restricting many people from their funds and what they can do with it.

With this approach, anyone can make investments or get into trading much more easily, and, most importantly, keep control in the hands of the user and not large corporations.

One of the preliminary benefits of this control is the improved visibility we gain over our financial data. In fact, any data we produce in general, whether online or through smart devices is predominantly controlled by giant centralised platforms such as Google and Facebook. In many cases users are unaware of where this is being sold on, or at least have been up until now.

As with DeFi and DApps, a way to decentralise this control has been introduced – in the form of Data Unions. A relatively new concept, this is a framework that enables individuals to bundle together their real-time data with others to create valuable insights which can be sold on, offering each the chance to earn revenue. It is helping businesses and individuals realise the value of the information they produce.

How does it work?

Our data on its own holds little value, but once bundled with multiple data sets from other people and sources and combined in a Data Union, it becomes an attractive set of insights to buyers who can use it to improve their market knowledge, product or service.

Data is shared through an app on the device or object via Streamr’s Data Union framework, a toolbox, which any developer or company can integrate into their existing products. It also allows individuals to choose which particular data types they share and monetise, and which they keep private.

This information then passes, encrypted, through the Streamr Network, to the Data Union where it’s bundled with others’ data for sale on the Marketplace – a process called crowdselling, which has the potential to generate unique data sets by incentivising trade directly from data producers.

What’s more, Data Unions can be set up to capture any form of data. For instance, a music streaming company could commission their own app where users could sell their listening and genre habits paired with their demographic info.

What has this got to do with DeFi?

Data Unions can help provide a means of DeFi direct to the people that need it most.

To break this down, a Data Union is beneficial because it enables any internet user to be paid for their data, which is unlike any data tax that has been proposed by many politicians. And, the advantage of a DeFi solution is that anyone can get paid from it because the finances are no longer dependent on their jurisdiction, but on which products they are using. Putting these together can have endless benefits.

We’re already seeing this happen, with a framework being used to improve the lives of financially marginalised groups. Tracey is a blockchain enabled Data Union working in partnership with WWF.

The application incentivises Filipino fisherfolk to record their catch and trade data digitally through direct data monetisation via the Streamr Marketplace. This data makes the first mile of their seafood products through the supply chain, traceable. With regional fish stocks declining, accurate catch yield data is a desirable insight for third party members such as retailers and final buyers.

The benefits of this model are twofold. Many fisherfolk in the Philippines are unbanked, meaning they don’t have a bank account. Trading this data gives them access to finance and loans previously out of reach, changing them and their family’s livelihoods. It also enables a self-sustaining ecosystem that captures accurate traceability data and helps these areas monitor their overfishing levels for more sustainable fishing.

What does this mean for us for the future?

We’re seeing a lot of momentum building around all forms of online decentralization,and the potential is huge. Over the coming years we will see these systems become ever more integrated into the existing internet stack, which will profoundly impact our possibilities online. Soon, it will become normal to take part in the internet’s data economy.

We see internet users becoming members of several Data Unions and have a range of different options to choose from that best suits them and their data sets. Personal data monetisation will no longer be a privacy issue we’re all suffering under, but rather a question of whether we want to sell our data or not. Users will have the freedom to choose for themselves if they want to sell their data or not and ethical data sharing will become the norm.

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Finance

ECOMMPAY expands Open Banking payments solution to Europe

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ECOMMPAY expands Open Banking payments solution to Europe 2

Open Banking by ECOMMPAY facilitates fast, secure and simple payments 

International payment service provider and direct bank card acquirer, ECOMMPAY, has today announced the expansion of its payment system Open Banking by ECOMMPAY to Europe. The solution allows consumers to initiate online payments to merchants.

Open Banking by ECOMMPAY leverages Open Banking technology, which enables third-party providers to access banks’ data to provide payment initiation through API connections. The news comes as research by the Open Banking Implementation Entity recently showed that uptake of Open Banking has doubled over the past six months, with more than two million consumers making use of the data-sharing service.

ECOMMPAY’s solution will allow consumers to connect to over 4000 banks in more than 28 European countries, while merchants can accept payments from customers in real-time, directly to their bank account. The solution is available in the UK, Latvia, Estonia and the Netherlands, and will be rolled out to further countries soon.

Benefits for consumers as well as merchants

For shoppers, Open Banking by ECOMMPAY means confidential information is accessed in a secure manner, compliant with GDPR requirements. Financial data is stored in one place so that credit decisions on loans or other transactions can be made promptly. Purchases can be made easily via smart devices, and consumers simply log in to their online banking via their mobile app to approve payments.

Merchants benefit from access to new infrastructure for payments. Without the need for credit or debit cards, chargeback risks due to fraud or an inability to capture funds are eliminated, while card fees are cut too. As the process does not require intermediaries, the payment process is efficient, and can also be customised by region, currency and other localised requirements. While banks usually have full control over the services customers need such as loans or transfers, Open Banking brings these decisions under a single administration.

Simplified European expansion

Historically, businesses growing into new markets would require a local banking relationship to facilitate the collection of direct debit payments, and face multiple complications around legal requirements, licenses and compliance. However, Open Banking by ECOMMPAY allows companies to use one efficient, cost-effective and simple payment solution to expand within Europe.

Paul Marcantonio, Executive Director of ECOMMPAY, commented: “Open Banking is revolutionising the way we pay, and the recent growth in its use indicates people are looking for more payments choice. Open Banking for Europe by ECOMMPAY will allow us to cater to the increasing number of people taking advantage of this secure, real-time and simple payment technology. Our solution will let merchants quickly expand into new markets and accept payments directly from customers’ bank accounts.

“With the pandemic shifting businesses online faster than ever before, the need for fast, safe and secure payment methods is growing. There is an urgent need to cater to a variety of payment methods, and at the same time to counter fraud and cyber-crime.”

ECOMMPAY has enjoyed steady growth since its launch in 2012, and has built a global presence with six international offices and operations in key markets including Asia, Europe, Africa, Russia and the UK. The company is a principal member of Visa and Mastercard, and a member of Visa Direct and MoneySend, as well as being the first payment provider on the PayPal Commerce Platform and the first acquirer to implement a Mastercard Dashboard.

The company will be hosting a webinar on Open Banking on 10th December. ECOMMPAY and its host speakers will look at the different opportunities that open banking brings for businesses, the challenges faced implementing it, and how to make it work from every business angle. Key topics will include how Open Banking will impact online business in the future, the effect of Brexit and Covid-19, and how to become an early adopter.

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Finance

The Hidden Costs of International E-commerce

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The Hidden Costs of International E-commerce 3

By Gavan Smythe, Managing Director, iCompareFX

Taking a business globally can be an attractive prospect, potentially targeting markets with fewer competitors, taking advantage of a larger consumer base and even gaining access to cost-effective manufacturing resources.

However, it’s not as simple as just shipping product overseas. Successful international traders conduct extensive market research, understanding each region’s barriers to entry – whether it’s regulations around communication and marketing, finding key contacts in supply chain management or navigating legal and cultural restrictions.

This also means identifying the hidden costs of international trading, which threaten the bottom line of businesses.

The price of peace of mind

Online trading isn’t without its complications. Buying online means handing over confidential bank or card details and, without the right protection in place, it can leave consumers open to theft and fraud.

That’s why e-commerce payment services include a gateway model, which secures transactions by encrypting the cardholder’s details and managing the payment process for the merchant.

However, like any specialist service, merchants pay to keep this sensitive data safe. Gateway fees are typically calculated as a percentage of the transaction amount. And while this payment model is useful for SMEs – helping them efficiently scale – it represents an additional cost that many business owners don’t account for.

Those tempted to simply roll out the cheapest service risk damaging their reputation by potentially being an unsafe seller and one which undervalues its customers. This will eventually impact revenue, as customers look elsewhere, and merchants navigate the costly time spent ironing out problems with insecure payments.

When it comes to choosing a payment gateway service, key considerations should include working with a provider which operates across the same regions and checking contract terms. Some providers may charge set-up fees, monthly subscription fees or implement a blanket charge if a minimum volume of transactions isn’t met.

Merchants should also consider whether to use a direct or indirect payment gateway. While direct payment gateways allow consistent branding with customised design and copy, it may cost extra to integrate the service with an existing website.

Indirect gateways take users away to a separate payment portal on a different page. This is cost-effective to install and can appear more secure to users as they may be using a familiar and trusted payment gateway brand

Calculating conversion fees

As a business owner, payment gateway solution providers charge a number of percentage fees. While for sellers in domestic markets the fee structure can be quite simple, for online sellers in overseas markets, the fee structure becomes complex.

For example, as an international online seller, you can be subject to additional costs for processing international cards, plus additional currency conversion costs back to your business’ home currency.

In some circumstances, this can cost up to 9 percent of your sale revenue. A business has the choice of passing these costs on to the customer or to reduce its profit margin in international markets.

Businesses shouldn’t rush when it comes to choosing a provider. Taking the time to review and compare what’s out there puts them in a stronger position to choose the perfect match.

Providers vary in their offerings, from the regions they operate in, to their fees and exchange rates and even transfer speeds. Those who value trust and transparency may be willing to pay slightly higher to work with a provider which offers exceptional customer service standards, helping them navigate the currency exchange process.

For those moving into multiple markets, it’s worth using a comparison service or tool to make sure they’re partnering with the right provider for each currency pair and region, as it’s unlikely a single provider will offer a blanket ‘best solution’ across the global market.

The role of multi-currency accounts

Having looked at the impact of currency conversion fees, what can businesses do to mitigate these costly charges when it comes to trading in an increasing number of currencies?

Opening a multi-currency account allows businesses to access the speed and affordable conversion costs needed to make the most of international trading. They allow businesses to access unique local banking details in foreign countries and all balances and transfer controls are accessible within a single dashboard.

Not only are the conversion fees associated with these accounts much lower compared with transferring currencies between bank accounts but it’s also quick and efficient – allowing businesses to access funds almost instantly and pass this convenience on to customers.

Specialist money transfer companies that offer multi-currency account solutions offer these services at no monthly cost. Simple and low-cost fee structures are applied on currency conversion and outgoing funds. And incoming receipts of money transfers don’t cost a penny.

Not all multi-currency account solution providers offer access to the same currencies. Furthermore, not all payment gateways offer support for payouts in multiple currencies. Businesses should conduct an assessment of current and future customer and supplier locations to choose the most appropriate solution provider.

Conducting an internal risk assessment helps businesses decide which multi-currency account makes sense for them, based on key requirements, like the number of supported currencies, target regions, potential overdraft facilities and ease of transfers.

Managing international suppliers

In many industries, international e-commerce is not as simple as just sending products to different regions. Logistics and legal regulations across the world mean businesses are often required to work with local specialists to deliver their service or offering.

This may mean working with local manufacturers to produce products in each region or simply partnering with local marketing, PR or advertising professionals to create culturally sensitive brand awareness in the native language.

In these cases, the business becomes the customer. They are required to make payments in multiple currencies as they manage their global operations.

For example, UK bank accounts charge relatively large fees to make payments in foreign currencies and these soon add up when running operations around the world.

This is where multi-currency accounts again prove fruitful. Not only do they allow businesses to hold multiple currencies – which is ideal for sellers – but they can also send money to other accounts with minimal fees if they’re in the same currency.

Paying suppliers in the same region as their customer base can remove the double currency conversion by receiving payment gateway payouts in the foreign currency and paying out of the multi-currency account in the same currency. No currency conversion is necessary in this scenario.

Businesses able to identify all these costs and admin fees up-front will be best placed to get the most value from the research and comparison stage when comparing providers.

Ultimately, they’ll achieve the lowest possible fees for each market, currency and transaction.

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