Alternative Financing: Using a Corporate Payment Programme to Improve Cash Flow

The general global business sentiment for 2012 is optimistic as expectations of a gradual recovery from global markets are under way1. However, many chief financial officers (CFOs) have concerns over the return of turbulent times, particularly with uncertainty around the US economy and European financial problems. These concerns are having a direct impact on companies’ cash management strategies.

Companies are constantly on the lookout to improve collections and credits, revamp internal processes and tap into investors for more cash, fearing that the economy takes a turn for the worse. According to a report by CFO.com on working capital management for small and mid-sized businesses2, when considering improvement of a company’s liquidity, nearly 30% of the 321 surveyed senior finance executives have looked at alternatives to traditional bank financing. Almost 50% agreed that finding new sources of working capital was integral to their organisations’ financial health.

Common cash management challenges include:

Delayed payments by customers

Outstanding and overdue payments remain a key problem for many companies. The report2 revealed that almost 50% of the 321 finance executives polled believed that reducing outstanding payment was essential to their companies’ financial health. However, 75% expected their organisations to remain stagnant or get worse through 2012. In contrast, only 2% anticipated a “substantially better” repayment cycle during the same time period.

High operating costs incurred by inefficient internal systems

According to IOMA’s 2012 Accounts Payable (A/P) Automation Report3, the top goals of A/P departments are reducing costs, improving efficiency and increasing timeliness.

Restricted access to bank capital

For established businesses, it is fairly easy to secure a bank business line of credit rather than a loan. However, interest rates on credit lines fluctuate and tend to be higher than on conventional business loans.

Since securing a bank loan or credit to fund a business is getting tougher, mid-sized businesses need to get creative to find financing alternatives. For businesses looking to fill gaps in funding, a corporate card programme is an accessible and affordable option.

How a Corporate Payment Programme Can Help Business Maximise Cash Flow

Many short-term financing alternatives exist. One of them is a corporate payment programme which provides a proven, affordable solution to the liquidity issue. The programme allows companies to extend their cash flow without incurring interest, plus receive rewards and cash incentives. Additionally, a good programme should offer online tools for financial managers to track and control spending, as well as other payables in real time.

The key benefits of adopting a corporate payment programme are:

Improve cash flow by providing an extended payment cycle

Choosing between paying vendors punctually and making payrolls is a common dilemma encountered by companies. A corporate payment programme, such as the one offered by American Express, facilitates companies with up to 55 days payment term. (See box)

Minimise financial risk

A common misconception about corporate cards is that they open up a company to fraud. Actually, it is the opposite. Corporate cards provide finance managers with tighter control over expenses. Companies can set spending limits on individual cards and specify different levels of liability for different cardholders or restrict purchases to preferred vendors.

Provide better insights on spending

By offering one centralised monthly bill equipped with online reporting options, a corporate payment programme helps companies to monitor their spending trends. This data provides finance managers with comprehensive insights which help their decision-making and budget planning.

Earn incentives and rewards

Companies can use corporate card programmes to improve their bottom-line by taking advantage of reward points and cash incentives earned on every dollar spent. A rewards programme can, for example, enable the company to earn points on business expenses and redeem these points for a variety of rewards, including credit on charges that appear on the corporate card statement, flights, hotels and car hire, as well as a selection of other reward items for business needs.

Case Study: Retail Shoe Company in Singapore

A mid-sized local retail shoe company was looking for ways to maximise cost savings and optimise its cash flow by adopting a corporate payment programme.

Development

American Express provided an assessment of cost savings from purchasing process improvement, sourcing effectiveness and payment cycle.

Result

With the implementation of a corporate card programme, the company made a monthly savings of up to 5% from its expenditure while the ‘additional cash’ was used to fund other cash-only expenses such as rental and payrolls. The company enjoys accelerated sales cycles and improved cash flow when they pay their suppliers with the card, which provides an extended payment cycle of up to 55 days. Relationships between the company and its suppliers were also improved as a result of prompt payments and enhanced purchasing processes.

Conclusion

Companies can only get so far trimming operating costs, chasing late payments and negotiating new payment terms with suppliers. Without the necessary capital to pursue new customers, business growth will be hindered.

Mid-sized and large businesses can improve cash flow by adopting corporate payment programmes. Positioning business expenses on programme such as the corporate card would yield multiple benefits in stretching company funds and provide companies with a strategic view to their spending. In an economy where every dollar counts, it is vital for finance managers to focus on maintaining financial discipline and ensuring they have sufficient cash on hand.

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