Loyal customers can be offered deferred payment terms or a pre-agreed payment plan
Companies with excess can consider supplier financing
A Cash Analytics tool shows the relationship between the delivery of the product or service, the billing date and the payment
Some time ago, you moderated a round table on Working Capital management. Which issues are high on the C-Suite’s agenda?
Filip Ceulemans: ‘Working Capital Management and Cash flow forecasting are still high on the C-Suite’s priority list. What struck me during the discussion, is that cash flow forecasting is still very often done manually. A lot of work is done in Excel. Yet quite a few companies are investigating how they can digitize that process.
‘A second topic that was heavily discussed is what an organization should do with customers who are in a difficult financial situation. Do you still want to do business with them? If your organization has a sufficient financial buffer itself, the consensus is that you can offer loyal customers solutions such as deferred payment terms, financing, a pre-agreed payment plan, and the likes.'
‘During Covid-19, companies have continued to do business with their loyal customers and are also willing to take more risk with them. Their aim was clear: instead of simply maintaining the customer relationship, they want to strengthen it. Customers will not forget that. They will not immediately turn to the competition after Covid because they realize they have been helped.
‘We are of course talking about loyal, reliable and solid business customers who are temporarily having a hard time due to the corona crisis. You know their business, and you know it normally runs well. Since the relationship in question is a long-term client relationship, you can accept slower or late payment. Such concessions are not an option with customers you knew were in a difficult financial position before Covid. That would mean you are taking too much risk yourself.'
Especially with negative interest rates, supplier financing can be a win-win-win for companies with excess cash, their clients, and the bank.'Filip Ceulemans, Client Partner CFO Services
Several companies have performed exceedingly well during the Covid epidemic.
Filip Ceulemans: ‘Absolutely. In the past year, some companies had simply too much cash and are currently being penalized by having to pay negative interest. They are wondering how to get rid of their excess cash.
‘One of the round-table participants was an organization from the insurance sector. The premiums continue to come in, while far fewer claims are being filed because many companies are closed during the subsequent lockdowns, which means that far fewer things can go wrong. Their cash out is therefore minimized, while their cash in continues to run normally.
‘This has created the Kafkaesque situation where some companies urgently need financing and did not get it, especially not from the banks because they do not want to take risks, while other companies have too much cash and then have to pay negative interest. A platform where both parties can find each other could be a great solution.
The main thing, however, is that companies can help each other. Supplier financing can be interesting for companies with excess cash, also in a triangle with a bank. A triple-A-rated supplier that gets almost zero percent interest rates can keep doing business with certain clients that are facing temporary financial difficulties. If these clients address their bank for financing, they might have to pay a hefty risk premium. An excess cash company could turn that around, acting as a backup. They can take out the loan and push it towards their client under strict supplier conditions. Especially with negative interest rates, that can be a win-win-win situation for the supplier, the client and the bank.'
By invoicing late, you lose a lot of time to bring in cash.Filip Ceulemans, Client Partner CFO Services
How did companies react when the economy was shut down last year? There was an increased need to finance working capital as payments were delayed and there were delays in receivables, while inventory stagnated or even increased.
Filip Ceulemans: ‘Most companies’ were mainly concerned with continuing their business. They took steps to safeguard their turnover. Companies that saw their sales decline had to adjust and slow down their production process to keep their inventory from going out of control.
‘In addition, we noticed a much stronger focus on receivables - collecting those invoices - but that is of course a balancing act. Especially at the start of the crisis, customers wanted to pay as late as possible and suppliers wanted their money as quickly as possible. That tension is always there but has become much stronger during Covid 19. A good consultation with customers is therefore extremely important.
‘Wondering whether they were invoicing on time, several round table participants also reviewed their billing process. By invoicing late, you lose a lot of time to bring in cash. Suppose you deliver a service today and send your invoice two weeks later with a payment term of the invoice date plus 30 days, then you are pre-financing for 30 days plus two weeks. Accelerating that process was on several CFOs’ priority list.’
The Cash Analytics Tool shows the relationship between the delivery of the product or service, the billing date and the paymentFilip Ceulemans, Client Partner CFO Services
Was factoring discussed as a possible solution?
Filip Ceulemans: ‘That is one of the elements that you can use to attract cash indeed, but it is a one-shot solution because you use factoring to get a head start. Going forward, your “lead position” will remain the same. You have a one-shot advantage. But it can be important for survival.
Which approach is preferable from a structural point of view?
Filip Ceulemans: ‘The structurally better approach is to optimize the process. First, make sure you invoice immediately if you provide a service or have sold something. Two: negotiate the strictest possible payment terms with your customers, and as flexible terms as possible with your suppliers. Again, that is something a company always should do but was brought to the fore by the Corona crisis.
‘The Cash Analytics Tool that we developed at the beginning of the crisis can make a big difference there. Basically a Power BI tool that can be put on top of any ERP system, the Cash Analytics Tool helps your entire management team to gain better insight into your working capital components and be able to better manage and improve your working capital position.
‘Most organizations simply calculate their DSO using the invoice date and the date invoices are paid. In a way, that's the theoretical DSO. But the Cash Analytics tool shows the relationship between the delivery of the product or service, the billing date and the payment. It gives you insights into “the waste” that is created in that process. That creates a great opportunity to sit down with Customer Service, but also with Sales to better negotiate your payment terms. In the tool, you can compare payment terms between different salespeople in a specific region. The tool can be used perfectly as a reporting tool, but is in fact set up as a management tool to actually manage and improve your working capital.’
Did you have the impression that many companies mainly try to get cash in without spending a lot?
Filip Ceulemans: ‘Yes. But you have to keep investing otherwise you will lose out. Many companies have put major investments on hold and are adopting a wait-and-see attitude. They know they should do better, especially when it comes to cash flow forecasting, a process that usually takes place somewhere at group level, but in order to manage your cash flow forecasting really well, you need to be able to go deeper into that organization to better capture the information centrally.
'Even though cash flow forecasting is considered to be really crucial these days, I find it a bit strange that there is still not a strong broad commitment to invest in automating these cash flow forecasting processes. There are still many companies that are satisfied with what they have put together and that think they can continue with it for the time being.’
The Cash Analytics Tool dashboard
To optimize your working capital, TriFinance developed the Cash Analytics Tool, a unique reporting tool that can quickly anticipate liquidity shortages. A proven rescue program from the 2008 financial crisis, the Cash Analytics tool identifies quickly available cash from managing receivables and payables. In economically challenging times, information quality and speed are of crucial importance for Cash control.