The Best Kept Secret About Working Capital

The Best Kept Secret About Working Capital

The importance of a healthy working capital cannot be over-emphasized. In this piece by Bank of America Merrill Lynch, BoFAML, there is a compelling theory that a well-integrated card programs offers working capital optimization benefits.

Few doubt the cost savings to be made by moving away from paper to digital, but in many markets, such as Europe, checks have all but vanished from many businesses. So what is driving the adoption of payment card programs in a post-paper world?

“From a B2B card perspective, the replacement of checks is still a really compelling reason for a lot of organizations,” says Caroline Paterson-Jones, commercial card product manager, GTS EMEA at BofAML, “However, in European markets, electronic payment has very much been the way forward for a number of years and here cards are looked at more from a working capital perspective.”

A Wider Purchase-To-Pay Solution

European companies are not alone in taking a fresh look at what a properly structured card program can offer. Multinationals with complex global needs are increasingly looking to integrate payment cards with ERP and other systems as part of a wider purchase-to-pay (P2P) solution. With the right approach to integration, cards can offer:

  • efficiency savings
  • working capital benefits
  • opportunities to access rich data for risk management, cost control and compliance purposes

Extend Payment Terms

At a time when so many treasury teams are looking to extend Days Payable Outstanding (DPO) as part of a working capital optimization program, it is the working capital benefits that can offer the quickest “win” for the treasurer. Tracy Stover, Global Sales Management executive for BofAML, explains that using a payments card can extend payment terms by almost two months compared to ACH, but the supplier gets paid at once.

“If a corporation pays a supplier by an ACH, that’s cash that is flowing immediately out of their account at the point that they press the button to pay the supplier. With a card payment, effectively the card provider is paying that supplier first and then, at a given point within a monthly cycle for a client, we will invoice the client and then invoke our payment terms for them on top of that. On average, that gives around 55 days working capital benefit as opposed to an ACH payment.”

Many of those implementing supply chain finance programs would be delighted with that result. To achieve it, however, demands a focused approach to on boarding the suppliers who will need to accept card payments and will themselves have to pay merchant service fees.

Jumping On Board

Paterson-Jones explains why so many suppliers are willing to make that change despite some initial reluctance: “If you turn the conversation around and say to a supplier, ’What discount would you give me if I were to pay you 10, 15, or 30 days earlier?’, that turns it into a very different discussion. We work with our clients to onboard their suppliers and to have that conversation, looking beyond the cost of acceptance and more to the benefits of early payment.”

The benefits to suppliers extend beyond early payment, however. The payments data available from a card program can be much richer than would be available from a standard ACH-type payment. For suppliers attempting to match high volumes of payments to invoices, this can deliver real efficiency benefits, especially when combined with accounts data that can be provided by the bank. As Stover says, benefits like these depend on a three-way consultation between buyer, supplier and card provider. “It’s about taking into consideration not only ourselves or what our customers are asking for, but understanding what the vendors and other parties need, so that it makes sense for all involved.”

An Added Bonus: Rich Data

The benefits of richer data are not confined to the supplier. Armed with a deeper insight into patterns of spending, procurement teams can negotiate better terms with key suppliers and have sharper oversight on spending by company personnel. In recent years a third benefit has emerged: the ability to track issues that the board may want to monitor.

Increasingly, says Paterson-Jones, these benefits are being leveraged through the integration of cards into a procure-to-pay platform. “We are seeing a need for an organization to have greater control but also empower their employees to do their jobs, as opposed to ‘procuring stuff’. This is a relatively new concept here in EMEA, and that’s something that we’re definitely working with our clients on. The benefit is that there is no longer one individual with a piece of plastic in his or her wallet or a piece of plastic locked in someone’s drawer buying on account on behalf of a department. Done well, this type of integration can remove the need for an administrator to spend so long chasing who has spent what and where we should allocate it for this month.”

Pay Everywhere: Extending Your Reach

With such strong benefits available, it might seem that implementing a card program would need little persuasion, yet it is essential to get every key player involved from the start. This includes not just the finance and procurement functions but also audit and compliance teams who will need to understand the reconciliation process. Technology can be the bridge that links all these functions together. The card programs that work best are those that are integrated into a wider digitization of the whole payment cycle rather than simply bolting the card program onto an organization. As Stover puts it: “If it’s not integrated to the overall strategy, it could be a short-lived engagement.”

Written by Tracy Stover, Global Sales Management Executive, Bank of America Merrill Lynch, BoFAML

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