The growth of electronic commerce (e-commerce) and mobile collections means corporations are getting paid faster and reducing the amount of inventory on their books. This gives them the opportunity to extend better payment terms to suppliers, improving their cash conversion cycle (CCC) – the time it takes to convert assets into cash – by making it as short as possible.
Online retailers such as Amazon and Chinese trade group Alibaba, which both connect hundreds of millions of consumers directly to thousands of suppliers, are transforming the payments landscape. They are able to negotiate better deals with their suppliers because of their stronger buying power and ability to offer a wider market for sales.
An RBS analysis shows that the world’s top e-commerce retail companies were able to hold off paying their invoices for almost 78 days on average in 2013 – keeping the cash on their balance sheets – while their traditional competitors had to pay within 51 days. The difference is similar for earlier years going back to 2009.
Retail companies using e-commerce for online selling, distribution and reconciliation of sales have a clear advantage over their traditional competitors when it comes to the order-to-cash (O2C) process as well. As goods are converted into cash straight away and they can receive and reconcile payments much faster, they can achieve a very low level of days sales outstanding (DSO). Also, as they can acquire items after receiving the order from their customers, they can achieve an efficient ‘just in time’ inventory thereby minimising their days inventory outstanding (DIO).
Bricks and mortar firms attempting to match them are finding it tougher to manage their working capital effectively.
This is a real problem, because optimising their CCC should be the cornerstone of any treasury to ensure the company is competitive. The analysis shows there has been a direct correlation between improved CCC and revenue growth for the Standard & Poor’s (S&P) 500 companies since 2008. Reasons for this include increased follow-ups over outstanding sales and tighter control over supplier credit since the 2008 global financial crisis.
Exploring New Options
Traditional companies are therefore looking at a number of ways to improve their CCC and optimise working capital.
Tools such as supply chain finance, which enables corporations to negotiate more flexible payment terms and offer cheaper financing options to suppliers, have risen in popularity as companies look for new ways to boost their working capital.
There are ways to accelerate the receipt and reconciliation process by adopting invoice data enrichment programmes, e-invoicing, e-receivable methods and other bank-driven programmes to speed up the reconciliation process of outstanding accounts receivables. Such tools have only demonstrated sporadic success so far.
Companies are also looking into the opportunities to collect cash quicker through non-cash payments, which are growing at a rapid pace globally. This is partly because of the economic recovery in developed countries and the continued, rapid rise of emerging markets. This helps companies selling to consumers and small and medium enterprises (SMEs) achieve a low level of DSO.
A specific issue faced by global firms making their own goods and shipping them all over the world is that doing so typically leads to a big ‘work-in-progress’(WIP) inventory and hence a bigger level of DIO. Companies can reduce the level of inventory by shifting manufacturing bases closer to their selling centres, or shifting from producing their own goods to buying them from elsewhere wherever possible.
The use of SWIFT as a payment mechanism and, more recently, ISO 20022 XML as a standard has been getting greater traction from corporations too. ISO 20022 enables companies to unify and standardise transaction types and make and receive payments in multiple countries across multiple banks and payment types.
Many governments and clearing houses have started adopting these standards within their payment schemes, such as the single euro payments area (SEPA) in the eurozone and Fast And Secure Transfers (FAST) in Singapore, with many other countries set to use them soon. These standards and the Common Global Implementation (CGI) forum mean that corporations can review, discuss and adopt unified payment methods and potentially achieve faster cash conversion.
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Only by embracing new opportunities will they then be able to compete with their online rivals.
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