A Toast to Working Capital Optimisation

SABMiller is among the largest beer manufacturers in the world. To illustrate this point in his presentation at this week’s ACT cash management conference 2015, Guy Ingram, its regional treasurer – Europe, explained that an astonishing 140,000 bottles of the company’s beers are bought each minute of every day around the world. This scale of operation means that working capital optimisation is critical to avoid a (non-beer related) headache.

Ingram described the three strands to SABMiller’s working capital optimisation, which focus on inventory, accounts receivable (AR) and AP. With inventory, the company can use off-balance sheet inventory financing, although he added that the hurdles for favourable accounting treatment are very high.

Invoice factoring is a tool that SABMiller will use to optimise AR. Ingram noted that treasury would look to this option where it is cost-effective and funding is required. The cost hurdles can be high however, as Ingram intercompany funding means that the equivalent cost of debt is public limited company (plc) based.

Supplier Financing: Taking Control of AP

The bulk of Ingram’s presentation covered AP, the third strand of working capital optimisation that treasury can focus on. He described how his team identified an opportunity around day’s payable outstanding (DPO) after carrying out some competitor analysis. The benchmarking research showed SABMiller’s treasury team that while they had a DPO of 56 days, their peer average was much higher at 103 days. The team extrapolated that, if they could push their DPO out to 90 days, there were potential working capital benefits of US$760m, with possible annual interest savings of US$30m.

With the opportunity identified, Ingram and his team had to figure out how to move DPO out by an additional 34 days without damaging their supplier relationships. The answer was to use supplier financing – sometimes called reverse factoring – to encourage their suppliers out in terms of DPO. There are benefits to both parties in going down the supplier financing route. Ingram explained that there is a working capital benefit for the supplier, because as soon as SABMiller approves the invoice the supplier receives their cash. This also creates a new credit and liquidity source for the supplier that is at lower cost than their own sources.

As long as the process is carefully managed, there is also no balance sheet impact of supplier finance. It is not debt, and therefore frees up existing credit lines. Enrolment into the programme for suppliers is easy, and they do not face any upfront or recurring costs to be part of the programme. This also brings clear visibility of the invoice approval process.

Of course, some suppliers that SABMiller deals with are vast corporations in their own right, so the offer of supplier financing may not always appeal to them. Ingram noted that the treasury team has developed a model that can calculate the supplier benefit, so it can be established ahead of time whether this option is likely to be worth offering to the supplier.

Looking ahead to the next steps for the company, Ingram said that dynamic discounting could also be used to optimise AP. This could allow reinvestment of cash released by supplier financing into smaller suppliers that have a higher cost of finance than larger suppliers. Overall, Ingram’s presentation gave conference delegates a great insight into how a large multinational strategically optimises its working capital processes around the world.

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