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WHITE PAPERTHE COMPLETE GUIDE TO WORKING CAPITAL OPTIMIZATION

5 WAYS TO

OPTIMIZE WORKING

CAPITAL FROM

PURCHASE-TO-PAY

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• Get 100% spend visibility

• Support strategic

procurement & facilitate

collaboration

• Increase the ROI of

automation solutions

• Reduce exposure to fraud

• Prevent financial strain on

the supply chain with the

right solutions

EXECUTIVE SUMMARYThis white paper provides an overview of different working capital optimization strategies and scenarios and offers insights on how financial leaders and treasurers should take advantage of new digital services to improve their companies’ bottom lines and working

capital positions.

cash more efficiently and improve business margins while supporting supplier requirements for cash. Taking advantage of this opportunity can favorably impact businesses’ return on capital employed and overall share prices.

THE ROLE OF TREASURYTo capitalize on the opportunity, treasurers should deploy a working capital optimization and payments strategy, in collaboration with procurement and finance. When treasurers become corporate-wide owners of the working capital strategy, they can do the following:

As a result, treasurers become strategic partners to their financial leaders through driving business improvement initiatives such as reducing costs, lowering supply chain risk, and optimizing the use of excess cash for better profitability – ultimately improving the overall financial health of the company.

TWO SIDES OF THE STORY: WORKING CAPITAL CHALLENGESWhile a number of businesses swimming in cash struggle to find suitable investment options for their excess capital, a far higher number of businesses grapple to find enough cash to finance their operations and growth.

According to S&P, just 1% of US businesses hold more than 50% of corporate cash1,

while at the same time the cash-to-debt ratio has lowered as much as under 20% for the rest of businesses.

Regardless of the challenges, it’s a problem for both treasurers and financial leaders.

THE WORKING CAPITAL OPPORTUNITYMany large companies are sitting on a record high amount of cash, and the piles are growing. However, interest rates are at historical lows offering companies limited opportunity for risk free returns. New financial circumstances pose a challenge to financial leaders and treasurers, as preserving principal and generating profits remain a daily challenge.

At the same time, the increasing amount of regulation increases capital and liquidity requirements for banks, and business partners may have trouble accessing cash. Ironically, the suppliers in the value chain are often the ones who need that liquidity to ensure supply to their customers and to grow. The restricted access to cash creates new risks in the supply chain that can have a negative effect on their buyers.

The emergence of digital working capital optimization services and the changing financial landscape present an interesting opportunity for everyone in the value chain to manage

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1 S&P Global: U.S. Corporate Cash Reaches $1.9 Trillion But Rising Debt and Tax Reform Pose Risk. 2017.2 Hofmann, E. & Belin, O. Supply chain finance solution. Berlin: Éd. Springer. 2011.

FIRST THINGS FIRST: OPTIMIZATION STARTS WITH AUTOMATION & ANALYTICS When people think about working capital management, improving collection of sales invoices (Days Sales Outstanding) and optimizing inventory (Days Inventory Outstanding) come to mind first. However, optimizing accounts payable (Days Payables Outstanding) and procurement are excellent working capital opportunities for a lot of businesses. These functions are best optimized through automated solutions that streamline processes across the entire procure-to-pay (P2P) process and collect vital financial data for advanced and predictive analytics.

By integrating cash and working capital management into the P2P process, businesses can take advantage to do the following:

By layering the financial data collected with actionable analytics, businesses can make the right decisions to release funds for self-financing projects, acquisitions and growth plans, or to finance their discount programs to save in purchasing costs.

As nearly 70% of treasurers have been mandated by their CFO to

drive working capital improvement initiatives, these solutions directly support treasurers in their efforts to make a strategic impact on their businesses.

DIFFERENT LENSES: HOW CFOS & TREASURERS SEE WORKING CAPITAL According to research reports, the priorities of treasurers are well

in line with their traditional role. Treasury’s agenda is dominated by topics like liquidity management, risk management, and funding. Despite 70% of treasurers receiving direct mandates from their CFOs, working capital optimization is still fairly low on treasurers’ lists of priorities. In fact, CFOs see working capital as a form of cash flow and balance sheet management, putting working capital on their agenda three times more often than treasurers3.

• Reach financial goals

quickly

• Process invoices faster with

fewer manual steps

• Achieve 100% spend visibility

to better forecast cash flow

and to put cash to better use

• Adopt new payment

strategies with Supply

Chain Financing

WORKING CAPITAL IMPROVEMENT INITIATIVES

WHAT IS WORKING CAPITAL OPTIMIZATION?

• Working capital management is defined as monitoring and

optimizing company assets and liabilities to ensure the most

efficient business operations.

• The optimization process consists of strategically managing

outstanding customer invoices, outstanding supplier invoices, and

the value of inventory to ensure the business has the right amount

of cash on-hand.

• It requires balancing between the two extremes:

√ Increasing liquidity and mitigating risk while decreasing

overall profitability due to higher inventory and financing costs

√ Decreasing liquidity and funding costs, while increasing costs

OR moving financial risk down the supply chain to a vendor

that is not able to carry it

• Working capital optimization is managed by analyzing company

operations through the Cash Conversion Cycle – the time it takes to

convert stock of raw materials, into a “work-in-process” status, and

then finally, finishing the product to be sold2 – to understand where

more cash is needed and where excess cash can be re-invested.

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CFOs believe in making bigger impacts to their companies through close collaboration between procurement, payables, accounting, and treasury. Since treasurers are responsible for the company’s payment infrastructure, it’s hard to believe that treasurer’s and CFOs have such drastically different agendas when it comes to working capital optimization.

Build on the Traditional Trade Finance

To meet the expectations of management, treasurers have traditionally been leveraging trade finance instruments such as letters of credit, bank guarantees, performance bonds, factoring, or invoice discounting. The challenge with these instruments lies in their inefficiencies. The agreements are largely in paper, and managing paper-based documents is time-consuming, preventing effective reporting and analysis, and taking up valuable time better spent on more strategic initiatives. The presence of paper prevents treasurers from scaling these instruments to effectively extend into all their business needs.

Trade finance has not traditionally been in the forefront of taking advantage of digital services but progressive CFOs can transform their financial organizations by harnessing new digital technologies. They can drive efficiency and catalyze growth from a global Shared Services Model, enable dialogue around smart real-time spend data, and deploy a working capital and payments strategy through process automation and digital services.

Alignment through Digital Services

Since working capital ties so closely to liquidity, treasurers can no longer ignore the contribution of working capital and payment strategy to their return on capital investments. In a new world with a volatile stock market and lack of low-risk options for investing excess cash, treasurers can be part of the CFO’s digital services agenda by applying digital services to optimize working capital and unlock cash for investments and growth, therefore maximizing capital efficiency and shareholder value – and aligning with the CFO’s strategy.

TAKING CHARGE: HOW TREASURY CAN OWN THE FULL WORKING CAPITAL AGENDA To take charge of a more strategic role in the business, treasurers need to integrate themselves into all financial processes. They need to address the accuracy and digitization of trade finance data by removing paper in the trade finance tools, and establish proper data analytics for better visibility into their business information. This requires automating tactical operations by removing manual tasks from their day-to-day operations. It also requires establishing an end-to-end view of cash and risk positions and closely integrating supply chain management. Through this transformation treasurers can become corporate-wide owners of working capital optimization, taking lead and deciding how funds are made available and where they are employed for the best rate of return. Here are 5 actions treasurers should take to own the agenda:

1. GET 100% SPEND VISIBILITY

Being more effective in working capital optimization starts from gaining access to real-time spend information in an electronic format

for both direct and indirect spending. In the P2P process, shared service centers (SSCs) may already have well established processes and visibility into procurement and invoice information. However, they may lack skills and resources to analyze information for working capital improvements. By collaborating with supply chain experts in procurement, and with the help of financial process automation experts in SSCs, treasurers can understand underlying business dynamics and give accurate guidance to both CFOs and procurement to optimize contracts and inform payment strategies.

2. SUPPORT STRATEGIC PROCUREMENT & FACILITATE COLLABORATION

In this new shared process, treasury and procurement can identify strategic suppliers and lower their supply chain risk by offering them Supply Chain Financing at an affordable cost. By extending supply chain finance into the long tail of suppliers, the company can systematically improve their Days Payable Outstanding (DPO) while at the same time offer every supplier an option to get paid early – meaning large companies can keep cash off the books for longer while suppliers can get cash flow right away.

3PWC: The ‘virtual reality’ of treasury. Global Treasury Benchmark Survey. 2017.

Treasurers can also help finance and procurement work together to secure early payment discounts to increase savings. In a research report conducted by Forrester for Basware, incremental early payment discounts amounted to approximately €850,000, an 80% increase in savings.

“THE UNIFYING THEME IS THAT CASH FLOW IS ABSOLUTELY VITAL TO ORGANISATIONS OF ALL SIZES AND INDUSTRIES IN TODAY’S ECONOMY, AND SUPPLIERS WELCOME CHOICE.”

Bill Cavanagh, Payment Service Manager, Islington Borough Council

“WE ARE NOW ABLE TO GO BACK TO OUR TOP 25 VENDORS AND SAY THAT WE CAN PAY YOU EARLIER, INSTEAD OF PAYING YOU IN 30 DAYS, WHY DON’T YOU OFFER US A DISCOUNT AND WE CAN PAY YOU SOONER? WE HAVE TRANSFORMED ACCOUNTS PAYABLE FROM BEING A COST CENTER TO BEING A REVENUE GENERATOR.”

Moolchand ‘Rock’ Persaud, Sr. Manager, Accounts Payable, Take-Two Interactive

3. INCREASE THE ROI OF AUTOMATION SOLUTIONS

As businesses release working capital from their balance sheets, they will improve their own financial position while enabling all parties in the supply chain to benefit from better management of working capital.

Worldwide, companies have the potential to unlock as much as $1.1 trillion US dollars from working capital4. In the European Union, unlocking working capital would equal almost 7% of the EU Gross Domestic Product (GDP)5.

By including working capital programs, dynamic discounting, and e-payments as a part of your P2P strategy, you can produce a substantial return on investment of your automation solutions. More automated and electronic procurement, invoice automation, and fraud control improves efficiency of both the buyer and the seller. As both certainty and assurance of trade and visibility of payments improve, business can increase the speed of trade at a lower cost of financing. Ultimately, businesses can make and take payments when it is the most beneficial to them without unfavorable side effects to the business partner.

The improved shared process not only opens access to amounts of cash previously tied up in business operations, but benefits the workflow of the entire organization, reduces possibilities for errors, and supports addressing the corporate social responsibility objectives of the company.

“WE HAVE A CULTURE OF PROMPT PAYMENT WHICH IS PART OF GOOD CORPORATE CITIZENSHIP. WHILE MANY COMPANIES IN THE PRIVATE SECTOR ARE HOLDING ONTO MONEY, WE ARE KEEN TO TAKE THE LEAD IN INNOVATION TO HELP OUR SUPPLIERS OPTIMIZE THEIR CASH FLOW, AS IT WILL BENEFIT THE LOCAL ECONOMY AND COMMUNITY. WE BELIEVE THAT ULTIMATELY, THIS MECHANISM FOR PROMPT PAYMENT WILL BECOME THE NORM IN THE MARKETPLACE, PARTICULARLY AS REGULATORY IMPETUS INCREASES.”

Bill Cavanagh, Payment Service Manager, Islington Borough Council

4PWC: The ‘virtual reality’ of treasury. Global Treasury Benchmark Survey. 2017 5REL: 2016 Europe Working Capital Survey

WORLDWIDE, COMPANIES HAVE

POTENTIAL TO UNLOCK $1.1 US TRILLION

FROM WORKING CAPITAL

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the moment when the purchase is approved – not after the fact when a surprise invoice arrives. When a company can more easily predict the timing of cash needs, excess cash can be put to better use even during short periods of availability. Digital processing also helps in compliance with anti-money laundering and managing sanctions risk.

5. PREVENT FINANCIAL STRAIN ON THE SUPPLY

CHAIN WITH THE RIGHT

SOLUTIONS

Services that release cash from operations without causing financial strain upon the supply chain are key to working capital management. These services maximize cash flow when needed and help put existing excess cash and newly released cash to better use.

Contrary to traditional trade financing solutions, modern working capital optimization solutions are completely digital, enable multiple funders, and can concurrently address different geographical and funding needs. The combination of purchase-to-pay, analytics, and working capital optimization solutions in the cloud makes the entire process digital and paperless; starting from onboarding of the suppliers, throughout the procurement and invoice processes, to early payment and funds settlement to the funder.

A suitable combination of services is built from dynamic discounting and supply chain financing solutions, influenced by the desired capital structure to optimize working capital. The three primary types of services are:

1. Supply Chain Financing – Harmonize payment terms and offer strategic suppliers an option to receive the payment early based on their cash flow requirements, through your preferred funding sources.

2. Dynamic Discounting – Use your own excess cash to offer early payments to suppliers against the discount determined by the acceleration of payment.

3. e-Payments – Extend your Days Payable Outstanding (DPO) across your supply chain to increase cash while giving your suppliers an option to get paid early by new forms of funding partners.

INCOME STATEMENT IMPROVEMENT (RISK-ADJUSTED)*

CO

ST

AN

D B

EN

EF

IT $10 000 000

$8 000 000

$6 000 000

$4 000 000

$2 000 000

$0

($2 000 000)INITIAL YEAR 1 YEAR 2 YEAR 3

P2P productivity benefits

DPO extension (SCF)

Dynamic discounts

Total costs

DPO extension (e-payments)

Cumulative total

WORKING CAPITAL

IMPROVEMENT

(RISK-ADJUSTED)*

Initial

Year 1

Year 2

Year 3

$0

$5 671 233

$17 013 699

$28 356 164

In the calculation above, the client benefits are increased by more than 6 million over 3 years. Additionally, these types of programs can help unlock cash equating to 5–10% of annual vendor spend which can then be used to stimulate company growth. In the calculation, aggregate working capital benefits amount to more than 51 million in cash over 3 years.

4. REDUCE EXPOSURE

TO FRAUD

With digital services, treasurers are in a better position to reduce exposure to fraud across the organization. With electronic procurement and automated accounts payable and payments processes, everyone works with a sole set of data through all the integrated services.

As business documents are no longer handled manually, and audit trails are integrated into the service, tampering with business documents becomes extremely difficult. With actionable analytics available to all the financial teams in real-time, finance professionals can pivot company financial decisions based on data they’re seeing by business unit, cost center, individual supplier or by specific invoice, and conduct closer examination as they find necessary. This all puts financial decision-makers ahead of pending payments and expands the planning horizon to

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GET STARTED: LET BASWARE HELP YOU DEVELOP YOUR WORKING CAPITAL STRATEGY

With more than 30 years in the industry, our consultative teams have the expertise to help you develop your working capital strategy, select the right combination of services, and roll-out the solutions across your enterprise. We can help you deploy working capital optimization

services that build on your existing purchase-to-pay and ERP solutions (with 250+ ERP integrations available) and develop a working capital and payments strategy that aligns and supports your business strategy.

First, together we take a look at your company’s goals. Then we build a business case based on your spend and invoicing information. We then work with you to determine the most optimal funding structure and

Figure 1 shows the various solutions available for every type of supplier – high volume, strategic suppliers, mid-level suppliers & long-tail suppliers.

AN

NU

AL

SP

EN

D

CO

ST

OF

CA

PIT

AL

Supply Chain Financing

Dynamic Discounting

e-Payments

design a specific program based on your suppliers, order volumes, and the best time for you to pay. As a result, you will receive an adoption plan for the services. By deploying the services with Basware, you can best address your financial responsibilities and priorities while driving business benefits through working capital optimization.

Get in touch with us to calculate a business case for you!

CONCLUSION: YOU CAN’T AFFORD TO WAITTaking control of working capital optimization and optimizing payment strategies makes Treasury a driver of profitable business relationships – and the time to start is now. With the three-step approach from Basware, Treasury can create a nimble and resilient supply chain by teaming up with Procurement. By looking at a single, integrated financial view of the business, you can identify growth opportunities as they arise and mitigate risk in the business, helping everyone succeed together. Not all heroes wear capes – make Treasury a financial hero today.

Figure 2 is an example from the spend analysis showing the breakdown of the spend across the supplier base.

Spend €1,028.24 MM

Suppliers No. of suppliers 2644

Transactions 256k transactions

Transaction period Invoice date: Jan ‘16 to Dec ‘16

Currency All invoice values in EUR

Countries USA, Germany, Sweden, Finland

88%

12%

38%

62%

20%

80%

Total Spend No of Suppliers No of Invoices

Transaction value and share of

spend

50k+21%

0–3k15%

5–10k15%

10–25k25%

25–50k16%

3–5k8%

ABOUT BASWAREBasware is the global leader in providing purchase-to-pay solutions, e-invoicing and innovative financing services. Basware’s commerce and financing network connects businesses around the globe. As the largest open business network in the world, Basware provides scale and reach for organizations of all sizes, enabling them to grow their business and unlock value across their operations by simplifying and streamlining financial processes. Small and large companies around the world achieve significant cost savings, more flexible payment terms, greater efficiencies and closer relationships with their suppliers.

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