Breaking down working capital
Working capital is the difference between a company’s current assets, like cash, accounts receivable and inventories of raw materials and finished goods, and its current liabilities, like accounts payable. It is also a measure of both a company’s operational efficiency and short-term financial health.
It is not uncommon to have other parts of the company, such as procurement and sales teams, focused as well on improving the company’s working capital metrics. At the end of the day, poorly managed working capital metrics may put a drag on the company’s earnings.Which parts of the cash conversion cycle do companies tend to focus more on?
For tech companies, we see a particular focus on receivables monetization to improve the company’s days sales outstanding (DSO). Receivables monetization is typically done by setting up a receivables purchase program. Such programs can be (1) an alternative and complementary to a revolving line of credit, and (2) an easy and unique way to increase cash without increasing financial debt.
On the flip-side, what are some overlooked opportunities when trying to optimize working capital?
In addition to improving the company’s DSO when setting up a receivables purchase program, it also allows the business to accept or offer longer payment terms to its buyers. By providing longer terms, the company is in a better position to win market share and sell more product, thus, improving the company’s sales. Our clients also tell us that receivables purchase programs (supplier-centric solution) help our customers keep more control in their commercial relationship with end buyers versus participating in a supplier financing program (buyer-driven solution).How big of a role do peers’ working capital metrics play for publicly listed companies?
Publicly traded companies put a great deal of attention to working capital metrics by comparing themselves to their peers. One way of achieving better metrics and to help with competition could be to set up specific working capital programs (either domestic or international) providing off-balance-sheet treatment and helping improve each component of the cash conversion cycle.What are the latest technology trends helping to facilitate and streamline working capital optimization?
Nowadays, many online platforms allow customers to directly submit receivables to their financial institution. BNP Paribas has a state-of-the-art online platform, allowing companies to create direct connectivity with their enterprise resource planning (ERP) system and upload batches of receivables to be discounted by the bank. In addition, BNP Paribas has relationships with fintechs (e.g., procure-to-pay companies), further automating the invoicing and cash recognition process.