If you’re responsible for running a business, you are well aware of the role working capital plays in conducting day-to-day operations successfully. As Investopedia puts it, an enterprise’s working capital ratio “indicates whether a company has enough short term assets to cover its short term debt.” It doesn’t get much more significant than that.
If the definition of working capital is common knowledge, so too are the problems related to keeping it at a healthy level. Chief among the issues faced is the unpredictable nature of when buyers will settle up invoices. In one survey of over 1,000 businesses, 57% admitted to intentionally paying invoices late for their own strategic ends. The number of businesses who make late payments to suppliers rose to 84% when the “intentional” factor was removed—highlighting the enormous problems caused by the complex paper trails and inflexible payment systems involved in B2B transactions. All this despite 90% of survey participants acknowledging that delayed payments have wider repercussions for the business environment.
With these numbers in mind, it’s easy to see how working capital levels can become a never-ending headache. It’s also little wonder a 2014 report from PWC outlined a global landscape in which “working capital performance has stagnated over the last five years.”
Naturally, the necessity of optimizing working capital means suppliers in a transaction frequently look to financing from other sources as they await payment from buyers. Working capital finance comes in many forms, and has diversified further as banks become more averse to bridging the gap for SMEs with the Supply Chain Finance method preferred by bigger organizations.
Myriad types of working capital finance vehicles exist to cater for this trend, including services from providers such as independent supply chain financiers, where financing comes from multiple banks, and others, that offer financing from the corporate buyer. Another option often favored by smaller businesses is Factoring, where a business has its immediate cash needs met by selling receivable assets to a third party. Newer services include specific funding marketplaces or aggregators in which investors buy invoices posted online by suppliers. One such service from the UK has funded over $700 million of invoices since 2011.
These and other working capital finance solutions have become an essential resource for many businesses, but naturally come with varying fees that render dependency on them far from ideal.
Today, there is a growing sense that successfully managing working capital is about more than finding the best rate of APR for financing, and is becoming increasingly possible thanks to FinTech advancements. In a list entitled “8 ways to improve working capital” by FM Magazine, one contributor highlighted how “firms can protect their cash flow, while ensuring that their suppliers are paid promptly, by using third-party payment providers.”
This sentiment is echoed by Bank Innovation, who believe one of the “game-changing innovations” in working capital finance will be faster B2B payments, or as they term it “e-invoicing on steroids.” By more seamlessly connecting Accounts Receivable and Accounts Payable processes, and accommodating the complex data that slows B2B payments, new transaction platforms can have a dramatic impact on a business’s working capital. We also tend to agree with Bank Innovation when they say the market leader in this emerging FinTech arena is Traxpay!
As with all areas of conducting business today, technology is reshaping the possibilities when it comes to managing working capital. Late, unpredictable payments have always posed a problem for cashflow, but it’s reassuring to know that there are solutions on hand to render them a thing of the past.