Lessons Learned to Unlock Free Cash Flow

Despite challenges in the local business environment, companies’ cash to cash cycle (C2C) has slightly improved from 55 days in 2017 to 54 days in 2018, according to a recent Malaysia report produced by PwC for Southeast Asia, the results of which are representative of opportunities seen by large companies in North America and Europe.

Within that figure, the most significant improvement was in days sales outstanding (DSO), with companies collecting receivables three days faster in 2018 than in the previous year. But with the improvement driven by the performance of large companies, the report noted that “the overall performance of small and mid-sized companies shows no improvement and a deterioration respectively from last year.”

The Bigger Picture

Among ASEAN countries, Malaysia’s C2C days’ performance came second only to Singapore. But looking at the global picture, the report also noted that Malaysia’s performance lags behind the U.S. and Europe, which have a C2C performance of 31 days and 36 days respectively.

The PwC report points out that higher adoption of supply chain finance (SCF) in the U.S. and Europe could have contributed to the lower C2C performance in those markets. As such, there is a considerable opportunity for companies in Malaysia – and in other markets – to manage their accounts payable more effectively through the use of SCF. As the report observes, “it is evident that Malaysian companies should explore further the available SCF options to release cash trapped in their payables.”

How Does SCF Work?

SCF – also known as reverse factoring – is a receivables financing technique that can unlock free cash flow for both buyers and their suppliers.

Using SCF, suppliers are given the option of receiving payment early via a third-party funder in exchange for a discount. The discount is based on the credit risk of the buyer rather than the supplier, meaning suppliers may be able to access financing at a lower cost than when using other funding sources.

As such, SCF benefits both parties:

• Buyers can preserve cash on the balance sheet for longer and sometimes use SCF in conjunction with an initiative to optimize supplier payment terms.
• Suppliers receive early payment, thereby improving their free cash flow while gaining access to lower-cost financing.

Adopting SCF

In the past, SCF programs were typically set up by multi-billion-dollar, investment-grade companies. But today, technology developed by innovative SCF providers is enabling growing numbers of mid-size companies to offer their suppliers SCF alongside their larger peers.

SCF programs are typically set up by companies in industries with high net working capital (NWC) days, and by companies that have higher NWC than their peers. It’s also a valuable solution for companies that are focused on freeing up working capital to boost growth, reduce debt or increase shareholder value – and for companies that wish to support their strategic suppliers.

Achieving Success

In order to make the most of an SCF program, companies may first need to overcome certain challenges. Often there may be a need to improve cross-functional alignment within different areas of the business, such as procurement and treasury or finance. It’s also important to set clear goals at the outset and communicate effectively with the relevant stakeholders throughout the project.

And it goes without saying that it’s important to engage with a suitable SCF partner who can not only provide the necessary technology and funder network but also advise on the best strategy for the program – from identifying the overall business value of the project to securing funders and onboarding suppliers.

Within the company, an SCF program should be supported both by a “champion” (typically a member of the finance team) and by a “spine” (typically from procurement). Together, they can drive the program within the organization, while working with the chosen SCF partner to adopt a successful program.

Room for Improvement

In conclusion, the overall working capital performance of Malaysian companies may have improved slightly last year, at least for larger organizations. But as demonstrated by the lower C2C figures in markets such as Europe and the USA, there is still plenty of room for improvement. By adopting SCF programs, even smaller companies in Malaysia – and other countries – can create new opportunities to release cash and boost working capital, both for themselves and their suppliers.

To learn more, download our eBook, “Making the Business Case for Supply Chain Finance and Dynamic Discounting.”