Access to credit is crucial to successful working capital management: it provides funding to keep operations ticking over and strengthen cashflow, which ultimately increases a company’s ability to grow.
Effective working capital management is particularly important for those in wholesale retail, as retailers rely heavily on large expenditures, such as inventory and employees, as well as facing the impact of both planned and unexpected fluctuations.
The 2015 survey by consultancy firm REL found working capital performance in Europe improved last year compared with 2013 and continues to progress. This was in part due to cash generation through operational efficiencies, but a significant proportion of the increase in cash on hand was actually down to increased debt. The ultimate goal for businesses is to obtain a negative cash conversion cycle, a measure that expresses how long it takes a business to convert revenue into cash.
However this isn’t easy, particularly for retailers waiting for their main source of revenue - merchandise sales - to come to fruition. What’s more, it can be tricky to negotiate deferred payments with suppliers, and then buyers often miss out on early-pay discounts.
As a result, short-term capital solutions are becoming almost a necessity to sustain operations and drive growth. These alternative sources of finance such as corporate cards provide retailers with a line of credit to settle accounts payable, bridging that gap between purchase and resale. However, selling time-sensitive items such as perishable goods brings a unique set of challenges.
Suppliers with warehouses full of fresh fruit will want to sell to retailers that can quickly access cash, and the fairly quick cash conversion cycle of perishables means retailers can easily work to the 58-day payment terms some card providers offer. Retailers can then spend this freed-up cash on making sure the produce gets to stores quickly.
A particular cashflow challenge for wholesalers is tax on imports. When buying items from abroad such as exotic fruit or imported alcohol, businesses often have to pay Custom duties the minute they obtain the goods. Even if retailers can’t use alternative sources of working capital directly to pay for this, using them for other costs does free up liquid assets to pay imports tax.
Banks often bundle solutions together into an overall package ultimately controlled by the bank itself, whereas alternative finance sources offer specialist flexible solutions that are complementary yet separate to the principal banking relationship.
However, the wider benefit of implementing new solutions to optimise cashflow is that it provides companies with the necessary financial scope for expansion. Banks are particularly wary when it comes to loaning to young companies and often request they meet additional security requirements, which can mean extra cost. For ambitious companies, short-term finance options are therefore a great way to free up funds for growth-related activities.
Alan Gillies is vice-president of sales at American Express Global Corporate Payments UK