What is the purpose of working capital? Seen often as purely a means of paying debts when they fall due, some companies are not appreciating the role working capital can play in funding growth and, as a result, are missing the bigger opportunity. A 2016 PWC report estimate an eye-watering £28 billion of capital is locked up by poor working capital practices in the UK(1).
If utilised strategically instead, working capital can be a catalyst for growth and a potentially cheaper source of cash than the more traditional overdrafts or loans.
Take the supply chain. Invoice settlement can be a critical factor in shipping. Accelerated payment can trigger faster shipments over the long-term. It’s common to build slack into a system to insure against variable payment times. When money moves faster, then transactions can be completed quicker. This contributes to a faster cash conversion cycle: a core objective of any finance team.
There’s more. Good payment practices can lead to warmer trade relationships. It may be possible for procurement teams to build a collaborative relationship with supply chain partners. This can mean bigger deal volumes and preferential treatment.
When it comes to sales teams, they can gain a tactical edge by understanding their role in improving working capital. Clients who pay faster can be rewarded with discounts. Conversely, a buyer can appreciate being given more time to pay. A negotiated offer of improved payment terms could be the difference between landing a deal or watching it slip away.
Naturally, even the finance department can be affected in unexpected ways. Bureaucracy is a key issue. Often, finance departments can become bloated and ineffective when burdened with chasing late payers: they spend longer on their accounts receivable processes and deploy more people to manage them.
However, it is clear that attempts to improve working capital by unilaterally altering days payable and days sales is an aggressive strategy. It impacts directly on counter-parties, who are asked to bear a deterioration in their own working capital. What is needed is a method of unlocking working capital, whilst being considerate to trade partners.
American Express Working Capital Solutions is a tool designed to achieve just that. The supplier identifies key customers and arranges for them to pay by American Express. Upon receiving an invoice, the buyer provides approval to their supplier who then draws down the funds on their account, receiving them within five banking days. The buyer then pays American Express in up to 55 days.(2)
The process means the supplier gets bills paid promptly. And the buyer gets an improvement to days payable, helping cash flow. The gain is mutual.
In short, Working Capital Solutions is able to repurpose cash locked up on a balance sheet as growth capital.
Clancy Docwra, one of the largest privately owned construction firms in the UK with a workforce over 2,500, wanted to focus on business development as it diversified into new sectors. As part of Clancy Docwra’s growth strategy, cashflow needed to be tightly managed. The firm adopted a solution by American Express to give accelerated payments for suppliers. Implementation was straightforward, with no changes to existing processes. It improved working capital and lubricated the supply chain, helping
Clancy Docwra achieve it its objectives.
Working capital can be the missing link in a growth strategy. Unlock it and the entire enterprise can benefit.
To find out more visit: americanexpress.com/uk/supercharge
(2) American Express Working Capital Solutions acts as an unsecured lending facility that allows the buyer to pay American Express in up to 55 days, while American Express pays the supplier in as little as 5 days. Fees apply according to the agreement terms.
American Express will be present at our CPO event in The Celtic Manor Resort on October 9th. To learn more, contact GB Intelligence on 01633 749520 or at firstname.lastname@example.org.
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