• Credit, credibility and credit ability in funding and managing working capital

    The perception is that credit is becoming dearer as banks raise their interest charges and their costs of servicing of any sort of credit and especially with regard to funding working capital.

    Why? Working capital can be manipulated by accounting techniques and is often not recorded accurately enough at the level of granularity required to satisfy lending/funding criteria

    The issue however is one of credibility. If one researches and reviews how credit is ‘scored’ and ratings arrived at one will find all manner of algorithm’s and so called justifications based on ‘hard choices’ namely numbers that supposedly portray your level of credit that is ‘acceptable’

    However the real level of credit should be based on ‘soft choices’, namely one’s ability to be able to regularly pay the required amounts for a sustainable period of time.


    Several steps should be taken by any business/organisation if applying for funding of working capital namely:

    a)      Understand the exact requirements of each funding amount i.e., is it to fund capex, Mergers  Acquisitions, disposals, restructuring, efficiency savings via technology spends, or to cover amounts of VAT, Tax or a bad debt etc.

    b)      One should arrive at a real DSO/DPO/DIO through analysing the trade debtors/creditors/inventory in great detail and applying any reserves in a logical and dynamic manner.

    c)       Deliver a strategy for Working Capital that embraces learning and development needs for all functions across the organisation/business to deliver cash.

    In conclusion one should be able to produce a document highlighting the above, so that the ability of the organisation/business to fund its obligations in a sustainable manner is clear for all to see.


    Posted on: June 17, 2014 by: mardle0312

    Cash, Credit, Capex and Culture via Communication

    Q1 2014 has seen the first reduction in the corporate cash mountains that have grown since the 2008 crisis. The reduction is due to large dividend payments, share buy-back programmes and indeed a significant amount of CAPEX (Including M & A) as the need for innovation and growth is now required to meet stakeholder expectations.

    Credit has played its part in this scenario as the credit agencies are duly increasing their credit ratings and credit limits for many of the corporates who are embarking upon the above journey, especially if they have paid back expensive debt too.

    However, how does one communicate this through the corporate organisation and to your customers, suppliers, investors, employees and other interested parties?

    Also how does the culture- the functions- in the organisation that were once ‘starved’ of cash and reducing costs now turn on the tap to create demand from customers, suppliers and investors?

    If the lines of communication are not balanced then one could soon see ‘overtrading’ occurring as profit outstrips available cash. In some organisations the demand chain will become out of sync with the supply and inventory chains which again could impact the investment chain when need for liquidity occurs.

    Cash forecasting becomes key, as this is normally the ‘communication’ tool however this tool is at the end of the ‘financial supply chain’ process.

    One needs to be agile and proactive by being immersed in the sales/procurement/operational and treasury teams to ensure that ‘checklists and balances’ are in order and that the culture of cash interdependence is upheld throughout the organisation. Early warning metrics are needed.

    In real terms this means communication lines between sales/procurement/operations and treasury being made strong but flexible. This is accomplished by salient KPI’s and metrics that support the cash conversion cycle of DSO, DPO, DIO and ‘allows’ for the capex(M &A)  scenario(s) mentioned at the outset of this post.

    Posted on: June 12, 2014 by: mardle0312

    Working Capital Strategy checklist published in Treasury Insights 12th June 2014

    Ensuring working capital is being used in an efficient way can transform a business. But it is important to make a distinction between working capital optimisation and merely releasing working capital. We look at some of the best ways for the treasury function to devise an effective working capital optimisation strategy.

    Earlier this month, research published in the UK put the spotlight on how some businesses try to fund their working capital. In ‘Charting the Trade Credit Gap’, the Credit Management Research Centre at Leeds University’s Professor Nick Wilson, and credit research group Taulia claim that the £327 billion of trade credit between non-financial companies is now the biggest source of credit in the UK economy. This makes it 20% greater than outstanding bank credit.

    According to the report’s authors, struggling companies often try to finance their working capital by paying suppliers more slowly.

    But working capital management is not purely a concern for businesses experiencing solvency issues. Nearly all companies can benefit in some way from optimising their working capital.

    Many people think that releasing working capital is the same as working capital optimisation (WCO). However, releasing trapped working capital is simply reviewing inefficient processes, whereas WCO is more about getting an effective financial supply chain in place. This means being proactive in areas from strategic alliances to delivering efficiencies in the cash conversion cycle.

    WCO checklist

    Treasury Today spoke to John Mardle, Managing Director and Working Capital Facilitator at CashPerform Limited, about how companies can optimise their working capital. Mardle has ten tips for reviewing a strategy to achieve working capital optimisation:

    a) WCO programmes must extend beyond the finance function and engage the company’s entire managerial team. Do not think that all working capital management problems can be addressed by treasury alone. Appoint local working capital strategy leaders or champions across the organisation.

    b)Do not artificially adjust working capital levels through delaying payments to suppliers or indiscriminately stepping up collection activities in order to boost quarter- or year-end performance metrics. In business, as in physics, every action is met with an opposite reaction. Delaying payments to vendors may reduce working capital over the short term, but that improvement is likely to disappear over time as vendors adjust their pricing accordingly. Dynamic discounting is now prevalent.

    c)Incentivise people to achieve their WCO targets by compensating staff accordingly, particularly at managerial level. User-driven key performance and risk indicators should measure the underlying causes of DSO, DPO and DIO. Take steps to monitor and manage these findings.

    d)Make a consistent effort to optimise working capital. It may be tempting to take the focus away from working capital when the company is growing as there may be less immediate need for it. Equally, in times of crisis, attention can be diverted elsewhere. Ignoring working capital could significantly inhibit a company’s ability to grow and meet demand once business rebounds.

    e)Ensure all hopes are not pinned on ERP implementation. Although ERP systems can provide significant benefits in the working capital arena, in the near term they can cause deterioration in working capital performance as key managers and employees are distracted from their daily routines and forced to fine-tune the new ERP system. Mobile applications are proving robust and agile.

    f)Ensuring suppliers and customers are collaborating effectively is now very much to the fore in demand chain management. Connect suppliers and customers across the enterprise to achieve maximum benefits.

    g)Provide added value for your suppliers. Major organisations are now using web portals and the like to deliver seamless accounting transparency for all their suppliers and their financial transactions too, wherever they might be in the world. Supply chain finance is now a major part of suppliers’ funding arrangements.

    h)Do not allow debt to become overdue before identifying and resolving disputes. Contact customers before payments are due to resolve any potential disputes and for delinquent payments, assign collection responsibilities to individuals and escalate the responsibility to more senior employees as invoices become further overdue. Have credit management as part of your strategy at board level.

    i)Develop forecasting techniques that incorporate intelligence from all relevant business segments, including not just sales but manufacturing, distribution and marketing. Evidence from these forecasts will assist in the production of company financial statements to investors in line with the Companies Act  2006, amended in October 2013 (Strategy and Directors’ Report Regulations).

    j)Look holistically at the whole financial supply chain. For example, is there a direct correlation between inventory management methods and the level of customer service that a company can provide? Do not allow one area to suffer as a result of  focusing attention on another.

    The journey

    Obviously there is no one-size-fits-all solution to optimising working capital. A lot will depend on the nature of the business and the profile of the company’s cash flows. But this advice should provide a sound point at which to start along the road to achieving more efficient management of working capital


    ‘Cash/credit are strategy, in that both, are like the life blood of an organisation, as restriction or termination of either can be measured, as the organisation deteriorates, or hopefully, improves.’

    The statement above requires three areas (levels) to be addressed within your organisation.

    The first level is whether you, as a ‘C’ level executive team , have a strategy regarding your financial supply chain and investment/cash/credit chains? If so what does it look like?

    The second level is whether the organisation understands the Working Capital Management and Optimisation criteria? Is implementation a project or a programme of work? If short term then, to measure ROI, the project approach could be very effective. Otherwise a programme may be required.

    The final level is the practical approach through Cash Conversion Cycle efficiency. This is where the physical transactional process needs to be amended to deliver the required savings.

    Posted on: May 27, 2014 by: mardle0312
    • Q)The Forum of Private Business claims that SCF should not be used as a cover for extending payment terms, as “it is a cost”. But wouldn’t receiving payment – through the SCF scheme – within 10 days rather than 60 mitigate, at least to some extent, the cost of that credit?

    A)The challenge for the ‘corporate’ is to identify the ‘critical suppliers’ and then identify a reasonable discount scheme ….but by company or certainly type of supplier i.e. logistics, marketing etc. This is poorly done by most corporates in my view as they do not value or ‘risk review’ suppliers properly.

    To apply a SCF scheme across the board can hurt the corporate and the SME as the margins of many SME’s are so small they cannot absorb a discount of any sort and if ‘included’ in the scheme they then find margins in the future decline and then go bust leaving the corporate without a critical link in the supply chain.


    • Q)Isn’t SCF a good thing for small suppliers, or does it depends on the type of solution and how it is used?

    A)Yes, as stated above PLUS credit is becoming scarce and very expensive per latest B of E reports and very little working capital  funding is coming through to small suppliers from banks.

    These small suppliers are now supported by a multitude of unregulated ‘funders’ from pension schemes to platform providers to crowd funders, to family members, to challenger banks to wealth management schemes….the list is endless but so much RISKIER for corporates to understand.


    • Q)Secondly, do you think that negative perceptions surrounding SCF might be hampering wider uptake, making it more difficult for corporates to on-board some suppliers? Are there any other factors at play here?

    A)As you say , wider uptake has ‘stalled’ by the ‘unregulated’ nature of the ‘investors’ to smaller suppliers and corporates are taking risks (hence credit insurance has risen dramatically and is ‘cheap’ compared to pre-crisis 2008.)

    The other factors at play here is the ‘quality of the invoices being used’ for the SCF process. With e-invoicing and other ‘checks’ NOT being implemented by UK business one has to ask the question ‘Is the invoice quality paper or toilet paper?’ In other words can it be validated? Can you ‘risk’ loaning money against it?

    This is reverse factoring abut factoring has specific safeguards that SCF has not yet covered.

    The next cash and credit crisis is just around the corner I am sorry to say as Charlie Bean (deputy Governor of Bank of England) pointed out in his exit speech over the weekend when he forecast interest rates rising sooner rather than later to 3%….six times their current level!!!

    Posted on: May 1, 2014 by: mardle0312

    Quality paper not toilet paper

    Recent experiences have shown several organisations crunching numbers and attempting to make the year-end revenues ‘fit’ through generation of somewhat suspect invoices.

    I say suspect in that the invoices are rushed out the door only to be returned due to:

    a)      Missing vital purchase order information

    b)      Incorrect bank account numbers entered

    c)       VAT calculated improperly

    d)      Customers address incorrectly stated as taken from the wrong database

    e)      Invoice number sequencing duplicated

    These scenarios not only caused a delay in payment but also damaged the reputation of the sales/credit function. Furthermore it has caused some customers to question the professionalism of the company concerned.

    Another repercussion was that two organisations were using the trading platforms of companies providing supply chain finance so now their lending facility has been adversely affected too.

    Posted on: April 10, 2014 by: mardle0312

    Invoices need to be Quality paper not Toilet paper

    When looking at the supply and demand chains within the both the physical and financial supply chains one can see that the pace of technological advancement in accounting and treasury functions over the past few years has outstripped the processes in pace.

    In other words there is an argument that solutions are now often leagues ahead of what processes can actually achieve.

    Back to basics is required in that the acronym TALC© where T is for timeliness of invoicing, A for accuracy of the invoice re computes correctly, L for Legitimate – in that it meets with all countries legal requirements and C for Compliant – where it reconciles to the good received note, purchase order , milestone criteria should be applied with rigour and in a robust manner.

    An invoice becomes a financial instrument of repute if TALC© is applied throughout the organisation.

    Posted on: April 5, 2014 by: mardle0312

    Suppliers? Why your credit limit needs credit managing.

    Recent figures reveal a huge surge, up by 32% to circa £2billion, in alternative financing outside of the high street banks. Corporates are applying supply chain finance (SCF) programs and many other suppliers are using everything from personal mortgages to crowd-funding to keep their businesses viable.

    The suppliers utilising SCF programs are reviewing credit limits to ensure timely payment of invoices whereas the suppliers using crowd-funding and other platforms are using their supplier’s invoices to fund their expansion programs.

    Credit controllers should be credit checking suppliers on a regular basis, but they will need to interrogate management accounts and the management team to obtain the detail behind their suppliers funding arrangements. This could cause internal credit limits to be driven by subjective analysis, so care needs to be taken to include sales, procurement and even board level directors, as the organisations strategy could be at risk.

    Supply Chain Finance (SCF)

    Corporates support their suppliers with access to early payment, mitigate risk in their supply chains, manage creditor payment days, and enhance return on capital.

    How SCF could work:

    Step 1 Your suppliers deliver goods/services and invoice your company as normal.

     Step 2 Your company approves the invoices.

     Step 3 Your company either sends to Finance Provider:

     a)    a file of all approved invoices, by supplier, with the same settlement date.

     b) Individual invoices when approved.

     Step 4 Finance Provider launches the trade and institutional investors fund the trade.

     Step 5 Finance Provider pays suppliers the day after the trade closes.

     Step 6 On the settlement date, your company simply pays the full amount due to each supplier to Finance Provider, which distributes the funds to the investor base.

     Possible Benefits to Corporates

    A)  Assist suppliers with working capital management thereby helping to stabilise your supply chain.

    B)  Opportunity to negotiate better prices and payment terms.

    C)  Reward key suppliers for service excellence.

    D)  Create access to new supply sources or regions as suppliers may now choose to supply your company safe in the knowledge that invoices can be settled within days, not weeks or months.

    E)   Utilise your company’s favourable credit profile to assist the procurement function.

    F)   Maximise financial stability within your supply chain.

    G)  No costs to your company to implement Supply Chain Finance.

    H)  Enable your suppliers to obtain cash without using your company’s own liquidity, if you don’t want to.

    I)    Opportunity to negotiate better prices, improve payment terms and even extend payment days, thereby enhancing your company’s working capital position and reducing your net interest charge.

    J)    Opportunity for your company to participate as a possible investor if you want to, i.e. your company could invest in its own invoices as an enhanced treasury and liquidity investment.

    K)  No finance costs

    Possible Benefits to Suppliers

    1) Improve operating cycle by turning receivables into cash much more quickly.

    2) Generate the potential for increased sales with your company as quicker cash facilitates quicker trade purchases further down the supply chain.

    3) Pricing is based on your company’s credit profile and not that of your supplier.

    4) Receivables are carried for a shorter period of time.

    5) Increase the advance rate against receivables to 100% for your suppliers who otherwise borrow on a percentage, typically limited to 80% or less.

    6) Mitigate concentration risk in receivables that your suppliers may carry if your company represents a significant percentage of their sales.

    7) Transaction costs are 100% transparent and known up-front, based on the payment term.

    8) Suppliers have complete flexibility and can opt in and opt out on a per invoice basis which means there are no lock-ins, security charges or debentures.

    9) Little or no impact on your credit rating

    10) No loss of control through dilution of equity or increase in debt.

    11) No IT costs

    12) No legal costs


    Posted on: March 11, 2014 by: mardle0312

    Overtrading? Then request more cash?

    With certain sectors and areas of the UK economy growing quite rapidly many businesses will be attempting to satisfy a growing order book without having the financial resources to do so.

    This will result in overtrading as their working capital becomes so stretched that eventually part of the financial supply chain will collapse leaving customers without their goods and services, suppliers without their cash and therefore liquidation could soon be the next course of action.

    So what can you identify in the financial supply chain that acts as an early indicator that cash is becoming scarce?

    Firstly payments of expenses/wages/salaries increase quite rapidly. This can lead to more orders being ‘won’ however to satisfy those orders one might need to commit to placing large supply orders on suppliers who themselves duly ramp up their ordering.

    Because of the terms and conditions of sale and purchase not being ‘measured, monitored or managed’ one might find that payments to suppliers are required before cash is received from customers.

    Then as services deteriorate or goods do not arrive, customers start to withhold payments.

    This is the cash conversion cycle at its ‘breaking point’ and when faced with such scenarios attempting to go to the bank, investors to obtain new funding arrangements could be a recipe for disaster.

    The solutions are numerous and it will be depend upon timing re seasonal markets, possible sector scenarios, attempting to negotiate earlier payment terms from customers, extending payment terms to suppliers, requesting more investment etc.