How Working Capital Solutions Can Accelerate Free Cash Flow – and Boost Your Capital Investment by 48 Percent

June 25, 2018
Edi Poloniato
Warehouse of goods - working capital solutions

Global companies have a staggering €1.2 trillion (USD 1.4 trillion) tied up in working capital, according to PwC’s Working Capital Report 2017/18. To put that figure in context, it’s enough cash to boost those companies’ capital investment by 48 percent – without them having to access additional funding or put pressure on their cash flows.

While freeing up working capital should always be a priority for any well-run business, it is likely to become increasingly important for companies of all sizes over the coming years. The long-term indicators are that interest rates will continue to rise, global growth will slow, and bank lending will become more expensive and harder to come by as a result of the Basel III and so-called Basel IV rules on bank capital and liquidity. It looks very much like the era of cheap money, which companies have relied on for many years, is finally coming to an end.

Working capital is not just a concern for global companies, including mid-market companies. It could also be a concern for those companies’ suppliers, which may be expanding fast and looking to enter new markets. They are probably already finding it harder than their larger customers to access affordable bank financing, and this problem is only likely to worsen in the future.

Related reading: Why Payables Financing is Key to Improving Working Capital and Supplier Relations 

So how can companies manage their working capital so that they free up their cash and accelerate their free cash flow, while also supporting their suppliers to fund their own expansion sustainably and cost-effectively? The answer is, by setting up a working capital programs such as reverse factoring.

Working capital programs are achievable for mid-market companies

There is a misconception that working capital programs are the preserve of multinationals and large corporates with revenues in excess of €5 billion (USD 5.7 billion). While there was once some truth in this assumption, today working capital solutions are an increasingly popular financing option for mid-market companies, including companies with revenues of less than €200 million (USD 231 million). That’s because technology providers, such as Kyriba, have developed bank-agnostic platforms, which allow companies to easily set up their own programs, without having to comply with the funding volume and onboarding requirements that a bank would typically impose on the corporate users of its in-house working capital platform.

When it establishes a working capital or supply chain finance program (SCF), a company typically offers its suppliers the opportunity to participate in the program in exchange for accepting longer payment terms. Suppliers, meanwhile, can obtain very early payment of their invoices if they agree to discount them. The SCF program may use reverse factoring, which is where banks and other funders effectively buy the invoices from the program provider and therefore benefit from most of the discount granted by the suppliers. Or it may use dynamic discounting, which is where the program provider uses its own cash to fund its suppliers and therefore benefits from the entire discount itself. Or it may use a combination of reverse factoring and dynamic discounting.

SCF can be a win-win for both the mid-market company that provides the program and its suppliers. This is because the mid-market company benefits from longer payment terms and supplier discounts, while its suppliers have the option to select a discount in exchange for early payment. Furthermore, the SCF platform effectively acts as a supplier portal, where suppliers can log in to see the progress of their invoices through the system. For the mid-market company, this reduces the administrative burden associated with answering suppliers’ queries. The system, which is fully paperless, also eliminates the use of letters of credit.

Used responsibly, SCF programs can be a way to strengthen supply chains and build loyalty within the supplier base, as well as to improve the working capital management of both the program provider and its suppliers. For example, French women’s fashion brand, Pimkie, uses Kyriba’s reverse factoring solution to manage its supplier invoice-financing program. Under the program, Pimkie’s suppliers can access a secure portal to view all of their approved invoices, and select those they wish to pre-finance. They can secure financing at more attractive rates than other short-term financing options that exist.

Benefits of a reverse factoring program

Thanks to the program, Pimkie has been able to reduce the time taken to pay suppliers by 40 percent – a 14-day improvement. It also improved its working capital by €8 million (USD 9 million) in the first year, and it expects to improve on this outcome further to free up between €12 million (USD 13.9 million) and €15 million (USD 17 million) annually. Another benefit of the platform is that it enables Pimkie to remain in closer contact with its suppliers, as per its corporate social responsibility policy, helping them to improve and make progress against key environmental and social criteria.

As more and more mid-market companies see their customers, competitors and peers roll out SCF programs, interest in the concept is growing rapidly. Additionally, the mid-market today boasts a greater depth of expertise and skills in implementing SCF than was the case several years ago. Implementation is made easier by the fact that packaged SCF platforms, with connectivity to enterprise resource planning (ERP) systems and third party funds, are readily available. These are both easy to use and efficient.

Kyriba offers a cost-effective SCF platform for mid-market companies that want to offer bank-agnostic early payment financing to their suppliers. The solution does not only accommodate reverse factoring and dynamic discounting, it also offers a combination of both. In addition, the solution can be integrated with Kyriba’s other treasury and CFO decision-making modules, all of which can be accessed via a single cloud portal. Kyriba helps companies to design the right SCF program to meet their key performance indicators and guides them through the supplier onboarding process, as well as technical integration with ERPs.

While rolling out a new SCF program will inevitably involve preparing a business case, making an investment in technology and undertaking some upfront work, it also has the potential to offer substantial rewards in the long term. Remember, there is a €1.2 trillion (USD 1.4 trillion) working capital opportunity out there for global companies – and SCF is probably the best way to seize it. Learn more about Kyriba's SCF solution or schedule a consultation

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