Tag Archive for: working capital

Tips & Tricks for optimizing Forecasting & Working capital

| 30-06-2021 | Cashforce |

The economy is poised for a rebound due to pent-up household demand coupled with historically low inventories. Businesses need to start preparing for the surge in orders and ensure they can sufficiently manage working capital and continue to finance their operations in the most efficient way.

Automating key elements of the Order-to-Cash process will allow businesses to absorb this revenue growth with their existing resources, while generating greater sums of liquidity — ensuring they can stay on top of their cash conversion cycles without the need for expensive and risky borrowing.

Watch Rob Harvey from Sidetrade alongside Nicolas Christiaen, CEO & Co-founder of Cashforce.

A few key points discussed in this session:

  • The importance of thinking about the process first to understand your cash flow drivers and to define what you want to measure.
  • Key to automating your processes is to start small, land & expand.
  • Create synergies by effectively combining cash & working capital data.
  • Building the business case internally by calculating the different aspects that bring ROI.

Are you ready for the economy to bounce back?

Watch this session on-demand Here

 

Factoring – Unlocking the (hidden) potential of your working capital

31-1-2020 | by Ron Wessels 

Do you also wait for your customers to pay you after a sale is closed? In today’s world it is getting more difficult to arrange cost efficient traditional bank financing and not everybody has sufficient cash reserves. If funding for you is tight, you can search for alternatives. Many suppliers of alternative funding are quite expensive and their business ethics are not always solid. Perhaps your working capital offers a better solution.

There is a way to convert your outstanding debtors into cash. This is called “Factoring”, offered by factoring companies.

How does Factoring work?

Depending on your existing AR (accounts receivable) portfolio an arrangement with a specialist factor provider can be made to sell those invoices on the date your issue them and get paid within a couple of days (mostly 2-3 days).

You receive most of the cash upfront but yet you are still in charge of the collection process and dunning (there are factoring companies that also offer credit collection services). You want to stay in control of the collection side as this is very important for your Customer Relation, e.g. you want to know if things are not going as they should be. You do not want to outsource the management of potential conflicts with your important clients. Your customers will pay into a bank account in your name but under custody of the factor provider. Obviously, you will have/need full insight on the activities on this bank account. Typically, you get funded about 90% of the face value of the invoice (ex.VAT) and the remainder minus costs, upon collection from the customer. The costs for factoring are depending on the size of your AR portfolio sold but vary around 1,5 to 4%, depending on aforementioned size (this is an estimate and have to be explored during an evaluation). This cost includes the credit insurance.
The factoring program can be tailored either on-balance or off-balance to optimize your accounting processes and your balance sheet strength. Factoring most of the times also requires a credit insurance for the outstanding accounts receivables. Both you as well as the factoring company want to mitigate the risk of clients who cannot pay.

Why is Factoring interesting?

Often factoring, including a credit insurance, is cheaper than traditional bank financing. Especially for companies with no or low credit rating. The factoring industry is more mature than many of the suppliers of alternative funding. This results in more stable processes and improvement of existing processes. Last but not least, the build-up of your balance sheet will be different resulting, amongst others, better financial ratios.

Is factoring difficult to implement?

Not necessarily, you need to agree on the terms and conditions with the factor, the credit insurance and it involves some legal advice/work. Furthermore, you need to agree with the factor on how to deliver the AR data (preferable automated) and the frequency of submission. As this is a mature industry, it is relatively easy to compare quotes of different factoring companies. Two further aspects are very relevant. The first is the quality of your existing processes. If your AR is a bit chaotic, it will be harder to implement the factoring services. Furthermore, the size and activity of your company is important. Small companies with a low number of deals will be treated differently by a factoring company. For example, a mobile telephone operator.

Conclusion

Factoring is a good alternative for traditional bank debt to finance your working capital. It will require up front work but once installed it is easy to maintain at a low cost. A quick scan of your existing AR outstanding can prove whether it is cost efficient to enter such program.

If you are looking for independent advice on factoring before reaching out to suppliers, please contact us. We are happy to help you.

 

 

 

 

Ron Wessels

Group Treasurer

 

IBOR phase out – a serious challenge

| 17-9-2019 | treasuryXL | Enigma Consulting

For the last 40 years IBOR (interbank offered rates, including LIBOR and later also EURIBOR) have been a fact of daily life in the financial services industry. They have been the benchmark for lending, hedge contracts, current accounts, valuation models etc. for a long time till the regulators, central banks and market participants decided to seek alternatives as from 2012.

Besides the switch to new reference rates, it now seems that alternative rates will be fixed afterwards based on a daily fixing component while the LIBOR Rates are now published at the beginning of each interest period.

Transitioning to alternative rates and calculation methods will be challenging, and it will have serious implications for both financial institutions as their customers on how lending and hedge contracts are priced and how treasurers manage risks and their working capital.

Although a lot of about detailed timing and specifications of the new reference rates is still unclear, we strongly recommend our clients  to be pro-active and not to follow the ‘wait and see” approach as the impact is expected to be substantial and the demand for resources to support these changes will increase in the coming months.

Bas Kolenburg: “Although this transition seems to be in the distant future, now is the time to start preparing! The impact can be huge….”

Enigma Consulting support both financial institutions and their clients to adapt to these new market circumstances. For financial institutions, Enigma Consulting provides project management support for the migration activities and client communication. For (corporate) clients, Enigma Consulting is performing impact analyses, that result in an action plan/ heat maps for the short and medium term. These action plans can then be used to prepare the organization for the expected changes and communicate with internal and external stakeholders such as your banks, market data suppliers, TMS & other systems suppliers and accountants.

 

Senior Consultant at Enigma Consulting

How can payments improve your working capital? Part I

| 6-4-2017 | Olivier Werlingshoff |

Working Capital is the term for the operating liquidity of a company that can be used and is needed to continue the day to day business. To calculate the working capital you have to deduct the current liabilities from the current assets. By managing your account receivables, accounts payables and inventory you can fluctuate your cash position and optimize your working capital so that the cash “trapped” in the company can be lowered to a minimum while you are still able to meet your payment agreements.

The way you are making or receiving payments can have influence on the trapped cash and therefore can influence your working capital.In a few articles we will dive into the world of payments and explain the influence on working capital. In this first article we will discuss the wire transfers within the EU and cross border.

Wire Transfer

SEPA
With SEPA all payments in the EU are considered as a local payment. To minimize your banking process time with bank transfers you don’t need to open local bank accounts in the different countries in the EU anymore. If you have a customer in, let’s assume Spain and you agreed on a payment term of 30 days, you send your invoice by mail as soon as the  client signed the contract. At that moment your working capital will increase with the amount until the moment the amount is paid into your bank account.

You can mention on your invoice that payments can be done by transfer to your IBAN number in The Netherlands. The maximum processing time will be one banking business day if you send the payment instruction before the cut off time of your bank. This means that if the client is doing the payment on Friday before the cut off time, mostly 3.30 PM, the amount will be on your account on Monday. Otherwise you will receive it on Tuesday.

Risk of non-payment
With wire transfers you still have the risk of nonpayment by you customer. Within the SEPA area you can also use Direct Debits. With this type of payment you can be the one who initiates the payment and if your client accepts, your money could be on your account after the agreed payment term of 30 days. Furthermore Direct debits can’t be reversed by your client when you use the Business variant.

Cross border
If you have a client in the US, you will also send him the invoice by mail to skip the postage process. You can ask him to transfer the amount to your IBAN number. The client will probably convert the amount in his own currency and make an international transfer. With a cross border transfer you will have different costs: the outgoing transfer cost, the incoming transfer cost and also even sometimes correspondent bank costs. Besides the high costs, payments can even take a week before reaching your bank account.

What is the effect on your working capital? Because it takes a long time before you get paid, your accounts payables will increase and the “days sales outstanding” will be longer than the 30 days you agreed on.
When you have a lot of international clients in one specific country you can make a calculation whether opening a local account in the country of your clients could be profitable for you. To avoid correspondent cost you can choose a bank that has connections with your main bank.
After receiving the money on your local account there are some instruments you can use to sweep the balance to your main account in The Netherlands, those products are called pooling techniques.

In the next articles we will focus on payments by internet, credit – and debit cards but also payment on delay and trade products.

Olivier Werlingshoff - editor treasuryXL
Olivier Werlingshoff

Owner of WERFIAD

 

 

 

More articles from this author:

Managing cash across borders

How to improve cash awareness without targets

 

 

The Five Cash Management Initiatives Treasurers Should Consider

|8-2-2017 | Jan Meulendijks | iTreasurer |

 

In October 2014 iTreasurer published an article ‘The Five Cash Management Initiatives Treasurers Should Consider‘ about how treasurers keep focus on ways to keep cash management in their organisation efficient and cost effective.  As this is always an important issue and also relevant in 2017, we asked our expert Jan Meulendijks to comment on the article.

Five initiatives

iTreasurer stated in their article that treasurers should spend their time on five initiatives and that they should be part of a treasurers’ overall budget and resource planning process.

Going beyond SEPA

iTreasurer stated: ‘Initially rolled out as an approach for risk mitigation for commercial payment transactions in Euro, SEPA adopters have found that SEPA, or the Single Euro Payments Area, provides a more efficient way to transfer and collect funds across borders without managing all the different legal payment frameworks of each country. But despite the many bright spots of SEPA, “reconciliation in 2014/2015 was still a challenge,”

According to Jan Meulendijks the development of reconciliation tools has now become an issue for ERP/General ledger software developers and that the banks do not need to focus on it any more. Processing digital account information/account statements are a well established feature of financial software programs and also include the processing of open accounts receivables.

Global Account Rationalization

‘The SEPA initiative has acted as the catalyst for other global projects, with high priority placed on account rationalization. By reducing accounts across Europe, many large US multinational corporations are realizing significant savings in both hard- and soft-dollar costs. “In the SEPA environment, all corporates needed was one account for payments and one account for receivables across the SEPA landscape,’ said Mr. Brieske, Regional Head of Trade Finance and Cash Management Corporates Global Solutions Americas, Global Transaction Banking, Deutsche Bank in the article. At that time keeping every bank happy was  a tough job, if not impossible. Being able to spread the wallet across fewer banks was one of the positive by-products of a bank consolidation.

‘Nowadays it is remarkable to see that “wallet sizing” has turned around completely,’ says Jan Meulendijks. ‘Today it is the companies that determine how much of their wallet will be handled by which bank and the banks no longer have influence on the amount of transactions with a company.’
In-House Bank Structures

Treasurers had  continued to find ways to alleviate the growing cash balances that had become strategically more important to their organizations. Structures like in-house banks (IHBs) were becoming more commonplace as organizations took the next step to further enhance their global liquidity models. The practical considerations for the evolution of the IHB could be directly attributed to global expansion and increased revenue mix overseas in addition to complexities related to time zones, language, growth of regional shared services and decision execution.

The Five Cash Management Initiatives Treasurers Should Consider

Jan Meulendijks states that in the chart of the article the first three steps of “in-house bank progression” are no real in-house bank developments, but treasury-related measures, that now also take place in medium-sized organisations. ‘Only if companies have a real ‘payment factory’, I call it a in-house bank.’
RMB Internationalization

As a result of the ongoing RMB regulatory changes, there had been a significant improvement in the ease of making cross-border RMB payments via China. The RMB was a fairly new currency on the international scene then. The RMB internationalization project had begun to pick up steam over the second half of 2014, with many global MNCs looking to launch new cash management strategies in Asia. New structures were thought to be able to unlock China’s previously “trapped cash” challenge, and optimize their cash held in this part of the world where many opportunities lie for them.

Jan sees a tendency today that the more the deregulation of the RMB progresses the more one can treat it as any other currency. However, this is not achieved yet and Asia will continue to be an region where ‘trapped cash’ occurs on a regular basis.

 Maximizing Excess Cash
According to Martin Runow, Head of Cash Management Corporates Americas, Global Transaction Banking, Deutsche Bank most MNCs then were still very risk-averse and focused on principal preservation. ‘The dilemma is corporates are looking for yield but there is little appetite to go into risky assets,’ he said in 2014. With the continuation of low yields, cash portfolio asset allocations were heavily weighted toward money market funds, US Treasuries and agency debt, corporate bonds above the single-A threshold and corporate commercial paper and certificates of deposit. Treasurers were thought to be well served to consider implementing an IHB so that their growing levels of excess cash could work harder around the globe versus sitting in a very low-yielding investment asset.
Now in 2017 Jan Meulendijks states that this is what treasury is all about: companies should not aspire  the role of banker, but submit their cash into the company’s operating cycle as working capital. In fact they should fall back on effective cash management: receive in an effective way and pay with as little cost as possible.
There is a lot to win for SMEs, too.
Jan Meulendijks


Jan Meulendijks
Cash management, transaction banking and trade professional







 Source: iTreasurer