The Quick Read
- 71% of Chief Financial Officers (CFOs) say it’s extremely likely that their organisation will need additional working capital solutions in the next six to 12 months.
- CFOs are navigating a challenging economy where rising interest rates and less accessible credit lines mean robust working capital is more urgent than ever.
- A lack of working capital leads to problems investing in strategic initiatives, expanding operations, and withstanding economic downturns.
- Finance leaders who achieve effective working capital management will see benefits that include freeing up cash, lower costs, minimised risk, and the ability to respond strategically to market opportunities.
In today's turbulent economic times, finance leaders face a challenging balancing act. CFOs assume the responsibility of freeing up cash to drive business growth while managing risk on behalf of their companies and associated stakeholders. In the American Express 2023 CFO Survey, data shows that the need for working capital improvements is a pressing one.
Our research, surveying over 150 CFOs from companies with annual revenue over £100m in the UK, France and Germany, reveals that increasing working capital in 2023 is a top priority. Nearly nine out of 10 (89%) respondents said that it was likely that they would need additional working capital in 2023, with the responsibility for both the strategic planning and the execution of working capital optimisation often landing on the desk of the CFO.
But CFOs also need to collaborate to boost working capital, working closely with Chief Procurement Officers (CPOs) to ensure payment terms and prices are negotiated. Maximising payment processes, both payables and receivables, can also deliver added liquidity. This might include striking the right balance between extending payables and maintaining good supplier relationships, or tightening up receivables policies and how a business manages customer debt.
The challenges facing CFOs, as they aim to increase working capital, reflect the wider trends revealed in our survey: a role that is evolving into a strategic, cross-functional one focused on driving business growth no matter the economic landscape.
What’s the risk?
Safeguarding your company’s working capital position is key, but the fact is that ongoing economic instability and further supply chain disruptions are a very real possibility. According to recent Deloitte research among European CFOs, the very real presence of rising inflation, skilled labour shortages, and continuing supply chain issues are all affecting the financial outlook of their organisations [1]. And with financing becoming more challenging and expensive, having too much cash tied up in working capital can become a strategic risk.
What’s the reward?
With benefits that include improved cash flow, profitability, and risk mitigation, working capital optimisation also provides a competitive advantage and instils stakeholder confidence through efficient financial stewardship. And the cash it unlocks is ideal for enhancing the company's financial health and market position, giving CFOs charged with driving business growth an excellent opportunity. According to a joint report by ACCA and BDO, CFOs are increasingly taking on more value-centric responsibilities than just the core role [2]. Achieving efficient working capital management clearly demonstrates that value.
The Deep Dive
Weathering economic downturns and market disruption, driving growth opportunities, investing in strategic initiatives, expanding operations: all depend on effective working capital management because, as we know, free cash is king.
Recent research conducted by American Express demonstrates that CFOs agree, with 89% of survey respondents believing they’ll need additional working capital in 2023. This was even seen as more likely than looking for ways to reduce costs, with only 26% of CFOs saying they’ll attempt to improve efforts to reduce costs in 2023.
With that in mind, here are four proven ways of increasing working capital.
1. Planning and Metrics
An effective working capital optimisation strategy starts in the planning stages. Performance metrics need to be set out from the start, so you can measure the optimisation’s effectiveness throughout, making sure it isn’t having a negative impact on cash flow and the cost of capital. As well as monitoring results, these metrics should be designed to keep organisational focus on continuous working capital optimisation.
The most effective metrics and analytics come from a solid data infrastructure, so your first step may have to be ensuring that your company makes sure its cross-functional data is consolidated into one single source of truth. These points are reflected in a report by McKinsey on adopting a data-driven approach to increasing working capital, which says there are five key factors necessary for success [3]:
- Transparency – for understanding which steps, entities and individuals can maximise the impact of digital initiatives on net working capital.
- Long-term perspective – bringing together all of the data – sometimes manually – that can help improve working capital will take time, especially when dealing with legacy systems.
- Granular KPIs – metrics should be focused, measurable, and closely monitored so action can be taken swiftly when needed.
- Historical data – analyse existing data to predict trends and emerging issues with managing working capital.
- Cross-functional collaboration – data is meaningless without greater awareness of the importance of cash flow management, making it a priority for anyone in the business who is able to influence working capital.
2. Strategic Procurement
Rather than leaving all aspects of procurement to the CPO, a CFO should encourage collaboration to ensure the procurement and supply chain management process is designed to improve working capital.
For example, analysing inventory data at Stock-Keeping Unit (SKU) level makes it easier to identify potential bottlenecks and to streamline the inventory management process. Smart inventory management ensures that levels of stock or materials aren’t unnecessarily high, thus locking in the capital, while also ensuring the business still has sufficient supplies to fulfil demand.
The supplier relationship is also one that can be leveraged to maximise working capital. Where hard negotiations may once have been a common tactic to drive supplier prices down, today’s market means delivering extra value to your suppliers and reducing their risk, for example by committing to a long-term contract.
As with any commercial relationship, a deeper understanding leads to better results, and analytics can reinforce that understanding. Strategic gains, for example, can be identified by categorising suppliers based on their transaction values and volumes.
3. Your Working Capital Cycle
While a CFO will be unlikely to have their company’s working capital cycle entirely within their control because of the variables involved, it’s wise to exercise as much command as possible. By analysing factors like cash, growth, and profitability, you can generate action-based insights in various areas such as logistics, demand forecasting, payment terms, and overdue accounts. This allows for a more thorough understanding of both leading and lagging metrics that impact the working capital cycle.
To help maximise your working capital while maintaining those essential supplier relationships, a payment solution like American Express Working Capital Solutions can help. A simple, flexible platform that lets you customise the terms set for each supplier, the solution ensures your suppliers are paid straight away and following their payment terms, while you benefit from up to an additional 58 days to fuel your cash flow. It can help boost your Cash Conversion Cycle, especially if you use the promise of early payment to negotiate a discount. While your repayment will typically meet your existing Days Payable Outstanding (DPO) terms, anything you save by way of an early settlement discount will also give the supplier a reduction in Days Sales Outstanding (DSO).
4. Stronger Bad Debt Management
Payment delays are commonplace: research by credit manager Intrum revealed that the average payment time of a UK B2B invoice was 51 days, despite the average payment terms being 38 days. In Germany, it takes 49 days on average for an invoice to be paid compared to average 37-day payment terms, and in France, it takes 55 days compared to terms of 39 days [3].
While chasing delayed payment might seem like a day-to-day part of the finance function that’s not worth a CFO worrying about, underestimating non-payment means a greater risk of bad debt. And written-off customer debt can cause serious working capital problems if these incidents become commonplace.
Mitigating the risk of late payers before you even start trading with them is an immediate win.
Vetting your customers before you begin a relationship shows just a single facet of an organisation’s financial health, and things can quickly change several months or years down the line. Consider whether you should move to a system of continual credit monitoring to help mitigate risk.
The most successful companies invest just as much time in debt prevention strategies as they do on debt resolution. Concentrating solely on existing issues without identifying how they got to that stage is simply firefighting, CFOs must engender a problem-solving, collaborative approach in their accounts teams to recognise and resolve potential issues before they arise. Focusing on your top late payers and solving the root causes of their payment delays can significantly impact your days sales outstanding (DSO) numbers.
Read the American Express 2023 CFO Survey for more insights into the challenges facing CFOs.
[1] Deloitte, Europe’s CFOs react defensively to the effects of inflation, 2022
[2] ACCA, Chief Value Officer - the important evolution of the CFO | ACCA Global, 2023