Managing the working capital impact of cash flows can give even the most experienced corporate treasurer a headache, regardless of whether they work for a medium-sized enterprises or a complex global organisation. HSBC's Sanjiv Razdan, Senior Vice President and Regional Head of Corporate Cards Commercialisation, and Con Archis, Regional Head of Corporate Cards of Global Payments and Cash Management for Asia-Pacific, explain how you can release working capital by introducing the humble 16-digit corporate card account into a company's purchase to pay processes.
Ask any corporate treasurer what keeps him or her awake at night and you can almost guarantee cash flow is near the top of the list. Ensuring a steady flow of cash is a critical task in any organisation irrespective of the industry in which it operates, because in its most fundamental form, cash is the driving force that keeps the company alive. Whether it is needed to pay salaries and suppliers or service loans, without a solid flow of cash the organisation will not succeed.
This is why so many corporate treasurers work hard to develop a robust working capital strategy that maximises cash flows, reduces the company's reliance on short-term debt and ensures it can cover its current liabilities and operating expenses. And while this might at first seem a relatively simple task – sell more and ensure buyers pay on time – in reality this is not the case.
In an increasingly interconnected global economy, there are many obstacles that threaten company cash flow and tie up working capital. Geographic spread can cause challenges thanks to an ever-growing reliance on global supply chains, which often offer significant reductions in terms of production or delivery costs. However, credit constraints can create an added burden on the supply chain if the organisation is unable to free up working capital in order to pay vendors in a timely fashion. As such it is important that corporates ensure easy access to cash or credit to keep the relationship moving smoothly.
Poor visibility over the entire accounts payable and receivable processes can also create problems, especially when organisations are trying to secure short or medium-term financing to cover the cost of daily operations, satisfy supplier payment terms and implement a growth strategy. Having a clear line of sight over your outstanding payments not only affords you greater control over your liquidity strategy, it also enables you to apply for credit as and when the company needs it.
Many companies are under pressure to reduce expenditure, and again this can be challenging when you are tied to lengthy internal payment protocols that leave vendors and suppliers waiting for invoices to be settled. This in turn can jeopardise efforts to negotiate better rates or faster delivery times that benefit the end customer. Implementing an automated solution that utilises a virtual 16-digit account number based on a card platform allows companies to drive vendor payables faster while also improving the impact of Days Payable Outstanding metric, which ultimately improves production cycle efficiencies and reduces time to market. And while it might sound paradoxical, a corporate card enables organisations to pay vendors more quickly while extending their DPO at the same time, because most companies rely on supplier credit to manage their DPO.
Corporates are also increasingly under pressure to reduce operating costs associated with travel, entertainment and daily expenditure, which often requires a more robust management process and strong cash position in order to meet payments up front or in short lifecycles. Again, this puts pressure on organisational resources and can create an impediment in the effective management of company cash flow.
Organisations are also faced with an ever-increasing slew of regulatory challenges depending on the market and industry of operation. These can come in several forms, for example the company might want to reduce reputational risk that has perhaps arisen as a result of slow payments, or it might be under increasing pressure to improve internal controls and compliance related to spend policy. In other instances, organisations may be motivated to streamline inefficient processes in order to improve employee productivity and enhance controls through the use of electronic workflow tools.
Overcoming these challenges can be difficult, especially due to the complex range of cash and trade finance products that are available in the market today. As a result, many companies are looking for innovative ways to manage these complex issues, but require a solution that is administratively easy to implement, cost effective in terms of change management and powerful enough to deliver tangible results in managing cash flows. The corporate card delivers on all of these levels.
Whether the organisation is looking to improve cost efficiencies and cash yields, or tackle greater issues such as working capital financing or strengthening internal controls and policy compliance, a corporate card offers an easy solution that helps companies manage working capital on a broad scale. A relatively mature product in the armoury of the treasurer, the corporate card is being redefined to manage payments across a full spectrum of expenses, from business travel and entertainment to supplier invoices and general operational costs, while freeing up cash within the organisation.
The corporate card has come a long way since the first credit card launched in 1949. In today's information age, where so much of our daily lives are focused online, the corporate card no longer needs to be a physical manifestation handed out to employees throughout the company. Today more progressive banks are increasingly offering corporate cards that can be used as a single source of credit across the entire organisation, allowing the account to be managed and controlled centrally. These accounts not only act as an alternative to cash, but actively convert credit to cash too, and as such are now being viewed as an effective cash management solution.
In its most basic form, this central corporate card can be used to cover a host of basic operational costs that are charged up front or need to be paid immediately such as airline travel, hotels, client entertainment and employee insurance. However, corporate treasurers are increasingly charging basic operational costs that are typically paid in arrears such as utility bills, couriers and office supplies, and in some cases they are negotiating payment terms with key vendors that allow them to settle bills using a company card.
Usually, treasurers deploy their corporate card account to pay for supplier invoices that are low in dollar value but payable on a regular basis. Such invoices create a pain point for finance professionals, adding to the workload of the accounts payable team in terms of reconciliation and settlements. These types of payment are also referred to as Maintenance, Repair and Ordering (MRO) invoices. Alternatively, when it comes to strategic supplier settlements or trade-related invoices, corporate treasurers tend to prefer to implement a supply chain or trade financing solution.
Using a corporate card account offers a host of simple yet key benefits that help free up cash and generate working capital. Perhaps most importantly, utilising a corporate card to pay a wide range of expenses affords the company up to 55 days of interest free credit (maximum DPO extension), which in turn offers greater flexibility for the organisation to manage their liabilities, saving time and effort. Unlike other means of guaranteeing payments, such as letters of credit, the funds that have been freed up can then be used to invest back in the business and drive revenue.
How a corporate card account works
In today's market, progressive banks typically issue their corporate card to departments that are responsible for making payments such as accounts payable or finance. However, physical cards can also be provided to individuals if they are required. The corporate card can then be used to pay on order (e.g. catalogue or online purchases), debited by the supplier when goods are shipped (e.g. travel agency charges once tickets are issued) or used as a standard purchasing card to settle expenses upon receipt of an invoice.
The corporate treasurer must work with the bank to address several criteria that determine how the card can be used safely. Spend category controls are identified in order to apply restrictions around how and where the card can be used. For example, some clients prefer the card to be blocked in certain categories such as casinos or retail shops etc. They may also wish to implement spend limits on certain transactions, and this can be aligned to the type of service on offer. Courier services for example are typically small amounts, while the cost of flights is higher, and so the limits should be set accordingly. Meanwhile, some organisations choose to set limits based on each individual (buyer) or their level and delegation within the organisation, and again the bank can develop a framework that works in tandem with internal protocols. By setting limits such as these, the company mitigates the risk of card misuse while ensuring the full range of benefits can be obtained.
Using your corporate card to pay a wider range of expenses also introduces a host of additional operational and regulatory advantages. A corporate card enables companies to receive a single, consolidated expense report, providing absolute visibility over any expenditure charged either at an institutional or individual level. These expenses appear in real time, often hitting the company statement within 48 hours of being charged. The accounts team can then generate reports however they choose, giving them complete control of how they view the data and allowing them to streamline the reconciliation process.
Reconciliation can be an extremely time consuming process that stands in the way of the production cycle and prevents the finance team from actively supporting the business with a strategic working capital plan. By introducing a corporate card, companies can reduce countless man hours spent processing individual expense claims and save a great deal of time when it comes to reconciling payments in the ledger or Enterprise Resource Planning (ERP) system. More sophisticated banking partners offer a platform that allows raw data to be downloaded directly into the ERP or a middleware Expense Management System (EMS), which negates the need to feed invoices in manually. This enables the finance team to be more efficient and reduces the risk of human error while also improving DPO rates and increasing liquidity.
Moving to a corporate card solution on the supplier payable side also helps to reduce hard dollar costs for the company. The organisation is no longer reliant on supplier-driven credit and may therefore be able to negotiate discounts with key creditors. Similarly, they will no longer be expected to cover the transactional cost of processing cheques or making wire transfers, which can add up to substantial savings when the company is working with a large number of vendors.
A corporate card can help with compliance risk too because the solution is designed to help prevent misuse. Not only do corporate cards allow companies to implement internal spend control limits, in some cases they also come with liability waiver insurance that can protect against fraudulent transactions. And in sophisticated markets such as Singapore, data is distributed online with two-factor authentication requirements, making this solution compliant with even the most stringent of regulatory requirements.
Corporate cards are also being used as an innovative solution to generate revenue streams from commodities charged on the card. Most companies are looking to stretch each dollar they spend, not just by increasing the number of days that cash sits in their bank account but actually driving a dollar revenue back from their outgoings. This innovative concept might sound too good to be true, but in reality it is highly achievable.
Banks today offer considerable cash rebates to organisations in order to incentivise the use of corporate card accounts, especially if the spend volume across suppliers is high. Therefore, the company not only saves on transaction fees they would otherwise pay for, like an automated clearing house or GIRO facility, but actually starts earning revenue as cash rebates simply by changing the instrument of supplier payables to a corporate card. This helps the company save money and reduces overall expenses because part of the cost is offset by the cash rebate earned.
As with any internal change process, implementing a corporate card solution designed to help free up working capital needs to be carefully considered, both in terms of commitment from senior management to drive the change and the organisational resources available to manage the change process within the company. The good news is that products such as these can be deployed on a modular basis, which means that the entire organisation doesn't need to adjust overnight, rather it can choose to implement the pieces it requires the most. For example, mid-to-small sized companies may simply implement the payment aspect of the corporate card solution as an easy way to extend DPO. Alternatively, larger organisations may choose to deploy a holistic programme inclusive of an expense management platform and auto-reconciliation, as well as ERP integration of reconciled data, which is more complex because it can impact everyone from Procurement to Human Resources, Accounts Payable and IT, among others. As such, it is important to choose a banking partner who will work with you in order to ensure the change process goes smoothly and efficiently.
When making this decision, several key factors emerge. Firstly, it is essential that you choose a bank that can support your geographical footprint, because they must be able to provide a consistent platform in every market in which your company operates, both today and tomorrow. Secondly, it is advisable to choose a partner with whom you already have an established relationship and who has a solid credit rating, which can be used to support your company's growth. But perhaps most importantly, in order to take full advantage of the automated solutions available to you, it is critical that you select a bank that offers an end-to-end solution incorporating direct and indirect expense reconciliation, which will save you the trouble of working with multiple vendors.
At the end of the day, it is essential that corporate treasurers embrace new and innovative solutions in order to speed up trade cycles, improve working capital and free up cash flow. A corporate card account provides a simple, effective means of achieving this. Safe and secure, not only does a corporate card increase control over a whole host of expenditure; it also enables companies to pay vendors more quickly, easing the reconciliation process and reducing DPO, thereby improving production cycle efficiencies and reducing time to market. But perhaps more simply, it provides an additional source of credit for the company, which in turn frees up working capital without the need to access alternative sources of borrowing, and can even generate a dollar revenue back into the business. As such, the corporate card is an essential tool in any working capital management strategy today.
An Australian multinational company was faced with several key challenges when it came to managing their working capital and ensuring a strong cash flow. The company utilised multiple payment methods including wire transfers, cheques and employee payroll reimbursement for business expense payables, which increased administrative and processing costs. The organisation also had limited insights into its suppliers and faced issues around managing policy compliance and transparency.
In addition, the company was unable to maximise savings through the use of preferred rates, because the lack of data was hampering the ability to track out-of-policy spending. And because the company didn't have an automated reconciliation solution in place, productivity inefficiencies were rife and the finance team spent far too much time on manual expense reconciliation, which meant that accounts payable had to depend on expensive short-term borrowing to manage cash flows.
Also, the company Days Sales Outstanding (DSO) extended more than 60 days, which was leading to disputes with their customers over invoices and resulting in the organisation having to squeeze suppliers in order to manage the cost of working capital. And the ratio of bad debt with customers was putting pressure on managing inventories, ultimately leading to pressure on cash flows.
The goal was to alleviate the strain caused by these challenges and significantly reduce the indirect costs associated with managing manual transaction workflows and short-term borrowings, not just to meet but actually optimise its working capital needs. It also wanted to improve operational cash flow and ensure additional funds were reflected in the balance sheet for year-end reporting.
The multinational introduced a HSBC corporate card account with a settlement period of 25 days, providing access to interest free funds for up to 55 days. It also implemented two procurement cards to maximise the settlement period, taking advantage of VISA's Vendor Matching Service to determine which of their vendors actually accepted the card.
The results were impressive. Not only was the company able to pay a much wider range of vendors, it also significantly reduced the fees it paid for merchant services, and introduced an attractive rebate structure that was expanded to include existing corporate card travel and entertainment spend.