• 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.

    How?

    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 12, 2014 by: CashPerform

    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: CashPerform
    • 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 19, 2014 by: CashPerform

    Working Capital Optimisation Minimizes Operational Risk Through Strategic Governance

    When tackling cash management issues the challenges can be broadly identified into two categories of Governance.

    The first category is rule based Governance. The rules for working capital could be for:

    Suppliers-Pay according to the agreed payment terms

    Debtors- Chase according to their overdue amounts

    Stock- Replenish according to the SKU parameters

    Work in Progress- Incur costs as allowed by systems and invoice according to accounting guidelines i.e. as laid down by SSAP9 Percentage of completion accounting

    The second category is through subjective Governance. The process of establishing working capital could be for:

    Suppliers-Pay according to a dynamic discounting,  supply chain finance programme.

    Debtors – Pre-emptive progressing followed by default analysis

    Stock-value is determined after establishing disposal costs

    Work in Progress- value is driven by establishing actual cash flows

    Both categories of Governance (Rule based and Subjective) require strategies that require C Level buy in however the more adaptable, agile and flexible organisations normally require a subjective approach which in turn requires delegation of the overall strategy to operations and purchasing functions.

    Whereas the rule based Governance of working capital can be delivered by ERP systems the subjective Governance requires management of each ‘link’ in the process of the financial supply chain.

    Let’s take the example of a strategy that calls for suppliers to be paid later therefore increasing Days Purchases Outstanding (DPO) and therefore ensuring cash is held for longer in the customers bank accounts.

    The usual traditional approach would be to instruct the payables function to delay payment runs or reduce amounts to suppliers.

    The new subjective approach is to appreciate and understand the creditors ledger by way of categorising suppliers by ‘value of risk’ associated with not paying them their due amount on the agreed date.

    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: CashPerform

    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.

    Posted on: March 10, 2014 by: CashPerform

    Releasing trapped working capital is simply reviewing inefficient processes, whereas Working Capital Strategy is more about delivering an effective financial supply chain.  This means being proactive in areas from strategic alliances to delivering efficiencies in the cash conversion cycle.

    Working Capital Strategy checklist

    Ten tips when reviewing a strategy to achieve working capital optimisation:

    1.   Working Capital Optimisation 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/champions across the organisation.

     

    2.   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.

     

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

     

    4.   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.

     

    5.   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.

     

    6.   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.

     

    7.                  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.

     

    8.   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.

     

    9.   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 re Companies Act 2006 as amended October 2013 re Strategy and Directors Report

     

    10. 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.

    Posted on: March 6, 2014 by: CashPerform

    Which finance provider should I use?

    A frequently asked question and one that requires a very lengthy solution although the following is a distillation of 8 years’ experience  and its simplicity never fails to surprise me as few ‘advisers’ undertake each category with the granularity and due diligence needed to deliver a reasonable conclusion.

    What is the organisations strategy and how does it relate to cash flow?

    Review sector, the market, aspirations of trading abroad, growth- organic and through diversification. Does ‘segmentation’ really mirror cash flows?

    What does the business model/operational plan reveal by way of cash ‘streams’ and the cash conversion cycle i.e. monthly DD, quarterly invoicing , contractual milestone payments, performance costs and revenues?

    What is the underlying performance of cash and how is it driven by KPI’s? Is working capital optimised and the interdependency of the demand/supply/inventory and investment chains fully understood and appreciated? Are people driven metrics linked to cash flow?

    What is the ‘risk appetite’ of the Board? Is it sustainable? Have external drivers been factored in via probability, scenario planning and risk mitigation?

    Conclusion.

    Once the above has been undertaken what sort of finance is required?

    Short Term – possibly reflecting efficiency or otherwise in the CCC

    Medium Term – is the operational plan reflecting the 4 ‘interdependent chains’ of WCO?

    Long Term – Is the strategy ‘wrong or right’?

    Narrative around the ‘providers of finance’ can now begin as one will understand ‘timing’ issues, it will identify whether opex, capex or M & A/Divestment  is required and the whole financial supply chain is now being, measured, monitored and managed.

    Alternatives, to traditional bank funding for working capital, requires due diligence

    With Basel III restricting banks credit facilities the tide of alternative providers is rising as they can deliver competitive costs of finance, pay as you go transactions, no charges or notice periods on the business, no personal guarantees, and are transparent to you as the customer plus your customer (the suppliers) do not need to know of your financing of their payments.

    If you have a cash conversion cycle that is both efficient and effective then alternative finance providers may be a good place to start rather than using personal mortgages, savings and/or credit cards but as they say ‘caveat emptor’ as due diligence is key.

    Furthermore one needs to fully understand your Weighted Average Cost of Capital (WACC) and whether current and future business trends will support such a strategy