New ways to optimise cash flow and working capital

The year 2020 – no-one could have predicted how it has turned out. .

Many companies have shredded their proactive plans for the year and have had to turn to reactive strategies ranging from shoring up the defences through to COVID-19 survival. Working capital and cash flow have remained king in 2020. Both to keep businesses operating but also to take advantage of what demand there is in the market.

For many companies 2020 has forced their hand to consider alternative strategies when it comes to cash flow management. While there have been plenty of reports of delaying payments, forward-looking organisations are embracing the opportunity to change their practices.

Even as Australia starts to recover from the demand drop caused by COVID-19, cash remains king for most organisations. There are not many companies that have not increased their focus on cost cutting and cost management.

Despite this the chances are that many have not considered all the types of finance tools that can be harnessed. Tools that can deliver significant cash flow benefits.

The cost of finance inertia

It may be a surprise (although it shouldn’t be) to many people that suppliers and especially those in the financial sector are not going to proactively offer you more attractive options unless you ask. They will also trade on the fact that customer inertia is highly profitable for them. We have said before that loyalty is a good thing, but blind loyalty – particularly to financial institutions, may cost you a lot of money in the short, medium and long term.

More than ever before financial institutions such as banks are either unwilling or unable (or both) to provide the agility and flexibility you may have needed or, more importantly, are very likely to need in the months and years ahead. Even with a significant demand drop caused by the pandemic, banks are demonstrably slow to respond, have tightened credit and have a low risk appetite to even extend existing facilities. In the current environment financial institutions offer what can only be described at best as ‘vanilla’ products such as loan options and overdrafts – almost all of which require assets as security. Further, offering flexible products that can scale with your business and provide the necessary boost when it is needed most, is simply ‘not in their vocabulary’.

You may think that cashflow finance is just for smaller businesses. Think again. Larger businesses are starting to look very closely at adopting a range of financing options from non-bank lenders. That kind of thinking would have been unheard of just a few years ago.

In addition to the pressure that comes with the current environment, there is now a concerted push from multiple levels of government to pay certain businesses within 30 days and in some cases, 5 days. As Australia comes out of COVID-19 that same payment pressure will (not may) soon come to bear on larger businesses in dealing with their local supply chains.

So out of adversity what is the opportunity?

Let’s assume that you may have exhausted most options when it comes to cuts to expenses or people or both. Further, you may have wound back marketing and executive plans.

However, have you had a long hard (strategic) look at firstly, how much cash you actually have employed in the value chain from procure-to-cash receipt and (more importantly), how much cash could you pull out of that value chain to be employed for other purposes?

There are a range of options that are worth looking at that fall traditionally under the finance umbrella that may deliver some results to optimise working capital and your cash flow position without any real changes to how you do business. Savings are determined by whatever it is you are doing now and the rates you are currently paying but could be up to 2-3% of input costs which translates directly to the bottom line.

Some of these options may challenge you to reconsider your trust in your bank. But, that is not necessarily a bad thing.

Looking at other options can also deliver a strong benefit to your brand in the marketplace. Companies which persistently pay late or try to negotiate longer terms suffer significant damage to their reputation through either the media (names like Telstra and Rio Tinto are recent examples) or through the informal (yet well-informed) ‘grapevine’.

Some options you may not have considered (or need to reconsider)

During 2020, we have been working with a number of businesses both large and small who have been considering traditional financing and other treasury related options as a means of either cutting expenses or more importantly, how to take advantage of COVID-19 induced growth opportunities that would not be within reach due to the lack of available working capital.

The benefit of looking outside your traditional finance institution suppliers is not just agility and flexibility but also the ability to embrace growth opportunities…

Here are some things to consider:

No Asset Security

Flexible options (read no lock-in terms) are available that provide the simplicity of no property or asset security. Such options can also be a complementary product to your existing banking or finance products.

Off Balance Sheet

Traditional finance often involves asset security with little flexibility in timing or the amount of funds required and must be shown in your balance sheet. With the advent of intelligent lending platforms combined with insured products which offer options around the amount and ting of availability of funds, it becomes an off-balance sheet item..

Supply Chain Finance

With many businesses looking for cash in the bank – many organisations are negotiating early payment discounts. Supply Chain Finance allows you to negotiate a discount from a supplier for up front payment and then pay back the amount later for a fee. If your procurement team are savvy negotiators, you can sometimes get a discount over and above the cost of the credit and provide a positive benefit to the bottom line. There are a range of disclosed or undisclosed payment options available as well as insured products in the market.

Supply Chain Finance also allows you to support potentially smaller suppliers such as social businesses who may suffer from cash flow challenges working with larger organisations.

Now, extend your thinking…

…what if you were able to offer the very same option (through an intelligent platform) that you offer to your suppliers to their downstream suppliers? In doing so you would not only collaboratively assist your supply chain, but also reduce the cost of your own revolving facility and/or deliver a further positive benefit to the bottom line. Sound improbable?

Not really. The ‘icing on the cake’ is that funding go/no-go can be provided to any applicant within 48 hours of providing all the required information by an applicant organisation – unheard of in traditional financing circles.

Know this – the reality of the current era of low interest rates through necessity has accelerated disruption in the finance space – Supply Chain Finance is but one example.

Trade Finance

With the ability to pay your suppliers up front and potentially extend payment terms out beyond the time you have sold the goods you ordered – Trade Finance allows you to fund expansion or demand needs fast. Especially for businesses who are importing directly – you can capitalise on large order discounts or simply meet the demands of up front cash payments in a tense market environment.

This can provide organisations with a powerful tool to take advantage of market demand and extend available working capital at all times.

Foreign Exchange

2020 has seen foreign exchange become highly volatile dependent on the market situation, COVID infections and geopolitical tensions around trade. The right solution for most organisations who purchase goods or services overseas is no longer just forward cover or spot – but a combination of these alongside structured options for larger purchases.

As volatility is at a significant high – you also need transparency and strong advice around risk mitigation as well as solid strategies to help your business shave small percentage points of your foreign exchange. Those small percentage points can be significant in dollar terms as you trade more.

While the overall trend on the cost of foreign exchange is margin compression – Australia remains one of the worst performing markets in the world (in terms of value to the customer) with banks retaining a stranglehold on most businesses.

This is a perplexing paradox as not one bank we are aware of in this country transparently shares FX pricing with its customers let alone provides a cohesive managed service around risk mitigation management.

Further, there are non-bank suppliers offering the same security as the banks, whilst providing transparent pricing along with strong risk mitigation strategies.

So why do businesses persist with FX trading with the banking suppliers?

We can only assume that it’s due to fear, uncertainty or doubt (aka FUD) – none of which are a good strategy in these times!

Invoice Finance

With many customers impacted by cash flow – payments are being pushed or or worse re-negotiated for the longer term. This, alongside unforeseen cash opportunities or requirements are reasons why the factoring of one (or more) invoices can make sense for any business. For a small fee (consider it akin to a customer discount for fast payment) you can receive a large percentage of the invoice amount up front to invest in opportunities or meet immediate cash needs.

Remember – we are in a period of historically lowest interest rates – so flexible finance products are not that expensive in relative terms – even less so, when one considers the potential upside benefits of grasping market opportunities.

Many options also provide the simplicity of no property or asset security required or lock in terms. This can also be a complementary product to your existing banking or finance products.

Asset Finance (Plant and Equipment)

There are more asset finance products available to businesses today than ever before and a significant part of the growth is coming from non-bank lenders who are able to provide a range of flexible products to meet a variety of needs. For those looking to invest in plant, equipment and vehicles, particularly in view of the eligible asset 100% tax write-off provisions available in 2020/2021 – there are many competitive rate options available as well as the options of secured and unsecured products to meet every need.

Another consideration is sale and lease back on owned vehicles as the market prices for used commercial vehicles have never been higher. You can generate immediate cash flow from the sale of the asset and lease the same vehicle back to maintain operations.

Customised solutions for your business?

One of the problems of dealing with the traditional finance sector (not just banks) is a lack of flexibility and ending up with a product that kind of works for your business. The right solution as in most areas is one that is customised for your business – rather than a product that works for everyone but not really anyone.

If you have done the same thing the same way for years and not looked into other options for finance or just need to consider all areas, then the first step is to have a conversation with a third party. If you have any questions, please do not hesitate to reach out and we can get you in touch with someone who can help.