Working Capital Levers to Support Cash Performance

We recently sat down with our partners at Esker and Craig Jeffery from Strategic Treasurer to discuss high inflation, rising interest rates, and how they are impacting businesses around the world. We specifically dug into the major impacts that the current macroeconomic environment is having on their working capital positions.

“We had a great discussion not just about the current conditions, but the levers that companies can use to improve their cash performance in the face of challenging times,” said Jeffrey. “It’s important to think of the resources and solutions we use to address improving cash conversion as ‘levers’ instead of tools, because a lever is adjustable and can be used incrementally as needed. 

“As conditions change, you have to be able to make course corrections and levers offer flexibility.”

Capital Markets

According to Jeffrey, one of the most important factors affecting businesses today is the availability of financing options. 

Brian Rieber, VP Working Capital Solutions at LSQ, is seeing a trend in lower availability and more restrictive lending solutions in the businesses he is working with. 

“Every single treasurer is telling us they’re actively trying to do things with their debt structure, today,” Rieber said, “and they’re experiencing additional covenants and tighter restrictions in any new financing. I haven’t met anyone recently who has said that it’s actually easier to negotiate something today than it was 12 months ago.”

According to Alex Weiss, Partner Manager at Ekser, Rieber’s observations are spot on and those trends are making people re-evaluate how they are funding their business operations.

“What we are seeing is companies rethinking longer term projects and longer term borrowing that pushes everyone to look at cash as a potential solution to fund the business,” said Weiss. “And when you are talking about using more cash, you have to look at liquidity measurements more closely to gauge financial performance.”

Finding the Right Measures

For the entire panel, cash conversion is the most important measure when looking at how your working capital is performing.

“The cash conversion cycle is the time needed to convert dollars from investments in operations to cash in revenue,” said Weiss. “The cycle takes into account the inventory you bought, the cash that’s held into accounts receivables, and the accounts payables where you benefit from extended terms.

“Finding the average for days sales outstanding (DSO) and days payables outstanding (DPO) are especially critical in this context.”

An effective cash conversion cycle means a shorter DSO and a longer DPO.

The Traditional Approach

According to Rieber, the solution most companies are implementing to optimize the cash conversion cycle is extending payment terms to suppliers to lengthen their DPO. 

“It’s industry dependent, but for mid-size to larger based organizations, we’re typically seeing a minimum of 45 days across the board,” he said. “Averaged out, net 45 would be where the majority of companies are today. That was a different conversation 10 years ago; we would’ve seen net 30 being well above 50 percent. 

“The trend is clearly longer payment terms and we don’t see that receding here in the short term.”

The problem with this is it increases DSO for suppliers and puts their financial health at risk–and, in turn, the health of the buyer’s entire supply chain.

“Traditionally, supply chains have been a zero-sum game,” said Rieber, “As customers have decided to unilaterally push terms out as they focused on their own cash initiatives or working capital goals it’s been essentially to the detriment of the suppliers who’ve just had to wait for that receivable to get settled at a later date.”

Finding the Right Levers

The panel agreed that finding the right balance between a healthy supply chain and optimizing working capital can be complex. There was also consensus that financial and technology levers are available to adequately address the issues, including automation, easy-to-use AP and AR finance platforms, third-party funding for early payments, and alternative funding options.

To learn more about how innovative companies are solving their working capital challenges, you can watch the panel discussion on demand now.