The optimization of working capital is often at the top of the list for many treasury management professionals. Pressured to work with both suppliers and customers on shifting payment terms, they often need to make sure the company has enough liquid cash to carry out their day-to-day operations.
According to a recent PwC report on working capital, “Cash is the lifeblood of any company. It’s more important than ever for businesses to optimize this fundamental aspect of financial performance if they’re to maintain a steady course in these uncertain times. Given that working capital is the cheapest source of cash, nothing is more vital than having a cash culture and good liquidity on board.”
To ensure that there is enough liquid cash to grow their operations, companies are increasingly looking at supply chain finance solutions as a way to free up cash by either reducing their days sales outstanding (DSO) or extending their days payable outstanding (DPO).
Yet despite the growing popularity of supply chain finance programs, only a handful of suppliers of a business are actually part of the actual program. Participants in PwC’s survey revealed that nearly half of all respondents included only up to 25 suppliers, which suggests there is potential of extending this to more suppliersin their respective ecosystems.
The key to making working capital optimization possible via supply chain finance is effectively analyzing data to ensure that companies are providing the appropriate duration of payment terms. Internal data needs to be sound and accurate within an organization, with the treasury management team making sure that all datasets are accurate and indicate the habits of their customers or suppliers.
A treasury management team looking to improve its work could also leverage their banking partner’s larger dataset of customers to ensure that their DSO or DPO is aligned with peers in their industry. They can then use that information possibly renegotiate terms with their suppliers or customers that is beneficial to all parties involved.
Asset Benchmark Research’s annual Treasury Review 2019 for example reveals that when asked what digital capability would positively affect a company’s decision to work with a bank, the majority of respondents were interested in big data working capital insights.
Some banks such as DBS and Citi are already working towards this by providing working capital analytics as a way to start a conversation with their customers on improving their working capital.