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CLOSE THE CASH GAP ANDOPTIMIZE WORKING CAPITALLearn how to bolster your financial operations forbetter cash flow

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MORETABLE OF CONTENTSIntroduction3Working Capital 1014Cash Challenges7Optimize Working Capital9Learn More142

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MOREA SMART APPROACH TOMANAGING WORKING CAPITALWorking capital plays an important role in the healthand efficiency of your financial operations. According toInvestopedia, an effective working capital managementsystem helps businesses not only cover their financialobligations but also boost their earnings.1To seize opportunities for future growth, businesses shouldfamiliarize themselves with the ins and outs of working capitalas well as the potential roadblocks that may stand in their way.One way businesses are overcoming obstacles and optimizingtheir financial operations is by adopting new tools andstrategies, such as advanced payment services and corporatecredit cards.Learn more about the challenges of working capital and keytactics to help improve cash flow so you can invest and grow.EXPLORE THIS E-BOOK TO LEARN MORE3

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESWORKING CAPITAL 101What is working capital?Working capital is the difference between a company’scurrent assets and its current liabilities.2Current assets: All the assets of a company that areexpected to be conveniently sold, consumed, utilized orexhausted through the standard business operations3OPTIMIZE WORKING CAPITALLEARN MOREOne way to calculateworking capitalThere are numerous ways to calculateand represent working capital. Here’sjust one illustrative example of aworking capital calculation.Cash4Accounts receivable5Inventories of raw materials and finished goods6Current assetsCurrent liabilities: A company’s short-termfinancial obligations7Accounts payable8— Current liabilitiesShort-term debt9Dividends payable10Working capital4

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MOREWORKING CAPITAL 101 (CONTINUED)Why does working capital matter?If a company has substantial positive working capital,then it should have the potential to invest and grow.11If a company’s current assets do not exceed its currentliabilities, then it may have trouble growing or payingback creditors.12Did you know?Even a healthy company may experience periodswhere its working capital is negative if it hasunexpected short-term expenses.13What is the difference between working capitaland cash flow?Some people may confuse working capital with cash flow.However, the two actually serve unique purposes. Whereasworking capital relates to a company’s current financialsituation, cash flow can extend into the future and, ifpositive, can lead businesses to ask, “What else can I dowith my cash?”5

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MOREUNDERSTANDING CASH FLOWWhat is cash flow?Cash flow is the net amount of cash and cash equivalentsbeing transferred into and out of a business.14Why does cash flow matter to working capital?Working capital requires monitoring a company’s assets andliabilities to maintain sufficient cash flow.15 Cash flow can bepositive or negative. When working capital is well managed,operating cash flows are stronger, supporting the abilityto invest and expand.16Positive cash flow indicates that a company’s liquid assets areincreasing, enabling it to meet its many objectives:17 Settle debts Reinvest in its business Return money to shareholders Pay expenses Provide a buffer against future financial challenges61% of companiesaround the world saidthey struggle with cashflow, which can lead tonegative outcomes:18Lost businessInability to payvendors and employeesIncreased borrowingcosts6

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MOREUNDERSTANDING CASH GAPSAs with anything in life, unexpected circumstances can happen in business. Even well-managed workingcapital can be susceptible to cash flow gaps. The key is to have smart strategies and plans in place tohelp minimize the gap and enable growth.What is a cash gap?The cash gap is the number of days from when you pay for goods and services you have purchasedto when you receive receipt of payment for the goods and services when they are sold. The moredays between these two occurrences, the larger the cash flow gap is within your business.19Businesses must always have sufficient cash to meet short-term financial obligations.20Yet over 56% of small and midsized businesses (SMBs) simplylive with liquidity problems.21Smaller, newer businesses are hitharder, with over 65% reportingchronic cash shortages.227

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MOREUNDERSTANDING CASH GAPS(CONTINUED)Why do businesses struggle with cash gaps?Late payments and market volatility are among the biggestreasons why SMBs and larger enterprises struggle withcash flow.23Understanding why you may be experiencing cash flowchallenges can help you determine the best path toovercoming barriers to healthy working capital. To start,businesses could look at five key practice areas:1Average age of inventory2Days sales outstanding3Emerging payment services4Days payable outstanding5Corporate cardsNearly 30% of businessesthat were paid late hadto take measures tocorrect cash flow or wereforced to delay paymentsto their own suppliers.248

WORKING CAPITAL 101INTRODUCTIONCASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MORE5 WAYS TO OPTIMIZE WORKING CAPITAL (PAGE 1 OF 2)When it comes to growth and development trajectories, a company should first take a deeper lookat its inventory and cash conversion cycle. Consider these practices to help close any cash gaps andboost your working capital.1Decrease the average age of inventory: Inventory turnover can be important to businessesthat sell physical goods, and any inventory should be viewed as cash. Having too muchinventory on hand, without the sales to offset it, may tie up your cash flow. 2Decrease days sales outstanding: The faster invoices head out the door, the greater chanceof getting paid sooner. There are a couple ways you could reduce the number of days it takesto collect payments: 3Uphold a “just in time” inventory stock model.25Speed up invoicing — Invoice customers as soon as possible and offer multiplepayment options.26Invest in new payment services: Nearly half of corporations are using or interested in usingnew and emerging payment services.27 Explore immediate payment functions, such as real-time payments, same-dayautomated clearing house (ACH) and blockchain, which can assist suppliers instreamlining overall financial operations.9

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MORE5 WAYS TO OPTIMIZE WORKING CAPITAL (PAGE 2 0F 2)45Increase days payable outstanding: A company with a higher value of days payableoutstanding takes longer to pay its bills, which means that it retains the available funds for alonger duration.28 It may allow the company an opportunity to utilize the available cash in abetter way to maximize the benefits.29Use and accept commercial cards: In addition to freeing up cash, a company can usecommercial cards to enhance security, streamline and control spending, and simplifyreconciliation. They also offer opportunities for you company to access additionalbusiness tools and programs that can help better manage your working capital. Explore the added perks of going digital: Commercial cards work well with businesses'drive to digitize back-end systems and processes 30 by helping to enable paymentsautomation and visibility.Businesses can maintain a healthy cash flow and optimize their working capital byusing corporate cards to pay for expenses they may typically pay for with cash.For example, small businesses use a credit card to pay for a vast array of business expenses:3173% — Travel, meals and entertainment51% — Operating capital64% — Procurement48% — Insurance54% — Online services like web hosting47% — Utilities53% — Advertising and marketing10

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MOREOPTIMIZE WORKING CAPITAL WITHCOMMERCIAL CARDS (PAGE 1 0F 3)With commercial cards, businesses can have more flexibility toreinvest their cash for growth. Consider the perks for your business —and your customers.Accepting cards: Benefits for suppliersIncreased security: Secure payments could mean spending less on threatremediation and more on reinvesting those resources elsewhere, such asacquiring new clients. Suppliers that use Enhanced Authorization — a freesolution from American Express — typically see increased approval rates,reduced false positives and fraud reduction of up to 60%, while maintaininga seamless customer experience.32Faster payments: Across B2B payments, the use of checks often resultsin slower transactions and manual processing. Accepting cards can helpsuppliers optimize their working capital by not only speeding up businesspayments but also boosting efficiencies.Simplified reconciliation: Moving to a more automated payable processcan help suppliers diversify business channels, bring in new clients and growvolume.33 Automation can cut costs by 81% and improve efficiency by73%.3411

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MOREOPTIMIZE WORKING CAPITAL WITHCOMMERCIAL CARDS (PAGE 2 0F 3)Using cards: Benefits for buyersGreater spend potential: Buyers will have more freedom to makelarger purchases using a commercial card versus drying up their cashon hand.Faster payments: Cards also offer the ability for corporations to makefaster invoice payments, thereby capturing early payment discountswithout actually letting go of capital more quickly.35More data insights: Buyers have the opportunity to use corporatecards to obtain expense data and analyze spend habits.36Corporate cards will popularize for business expenses in theUS, with volume growing 33% to 763 billion by 2022.3775% of smallbusinesses usebusiness creditor charge cards.3812

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MOREOPTIMIZE WORKING CAPITAL WITHCOMMERCIAL CARDS (PAGE 3 0F 3)Card benefits for suppliers and buyersAccelerated payments: Quicker payments can help minimize potentialcash gaps. With card acceptance, vendors can get paid “significantlysooner” on a cost structure that is more affordable than the cost offactoring their outstanding invoices, while allowing clients to maintaintheir current days payable outstanding.39Payment flexibility: While suppliers are paid immediately, cards alsooffer more flexibility for buyers by allowing them to pay on time andstill access flexible or extended billing periods. Bonus: Brands that addpayment terms to the mix stand to improve customer satisfaction andcreate opportunities for a boost in business.40Improved customer satisfaction: By bringing aboard the preferredpayment options of B2B buyers, sellers have the opportunity to boostbuyer satisfaction and even increase average order volume alongthe way.4113

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALLEARN MOREIS YOUR BUSINESS READY TOOPTIMIZE ITS WORKING CAPITAL?From improving your cash conversion cycle to acceptingcommercial cards, there are numerous ways to ensure yourworking capital is working for your business goals. With the rightsteps and smart strategies in place, you can pave the way foryour company’s long-term financial health, operational successand growth while accommodating buyers’ payment needs.When it’s time to start your journey, or when you need apartner along the way, American Express is here to help.We offer innovative solutions — including Buyer InitiatedPayments, vPayment and corporate cards — that could helpyou optimize working capital and grow your business.WANT TO LEARN MORE?If you want to find out more about improving yourworking capital and other important B2B industryinsights, American Express can help.LEARN MORE14

INTRODUCTIONWORKING CAPITAL 101CASH CHALLENGESOPTIMIZE WORKING CAPITALSOURCES1“Why Working Capital Management Matters,” Investopedia, July 2019, y-working-capital-management-important-company.asp (accessed January 21, 2020).2,4,5,6“Working Capital,” Investing Answers, October 2019, capital (accessed January 21, 2020).“Current Assets Definition,” Investopedia, June 2019, .asp (accessed January 21, 2020).37,8,9,10“Current Liabilities,” Investopedia, October 2019, ities.asp (accessed January 21, 2020).“Working Capital (NWC),” Investopedia, September 2019, l.asp (accessed February 3, 2020).11,12“What can working capital be used for?” Investopedia, June 2019, at-can-working-capital-be-used.asp (accessed January 21, 2020).1314“Cash Flow,” Investopedia, May 2019, https://www.investopedia.com/terms/c/cashflow.asp (accessed January 21, 2020).15“Working Capital Management,” Investopedia, October 2019, lmanagement.asp (accessed February 4, 2020).16“Boost Business Resilience by Improving Net Working Capital,” BCG, November 2019, x (accessed February 4, 2020).“How are Cash Flow and Revenue Different?” Investopedia, November 2019, at-difference-between-cash-flow-and-revenue.asp (accessed January 21, 2 020).17,20“Cash Flow A Tough Lesson To Learn For SMBs,” PYMNTS.com, February 2019 l-business-cash-flow-invoice-risk/ (accessed January 21, 2020).18,2319“Stop the Cash Gap Slap,” Smart Advance, September 3, 2019, / (accessed February 6, 2020).“Closing The SMB Receivables Gap,” PYMNTS.com, December 2019, ing-the-smb-receivables-gap/ (accessed January 21, 2020).21,22Payment Practices Barometer U.S. June 2019, Atradius.2425,2627“Entrepreneurial Finance: Managing Cash Gaps,” Karitrade, October 2019, neurial-finance-managing-cash-gaps/ (accessed January 21, 2020).“2019 B2B Payments Survey Report,” Strategic Treasurer, Bottomline, 2019, urvey/ (accessed January 21, 2020).28,2930“Days Payable Outstanding – DPO Definition,” Investopedia, January 2020, https://www.investopedia.com/terms/d/dpo.asp (accessed February 4, 2020).The Payments Ecosystem. November 2019. Business Insider Intelligence. intelligence.businessinsider.com (accessed January 21, 2020).Payment Cards and B2B Payments: Riding a Wave of Positivity,” Mercator Advisory Group – 2019 Small Business Payments and Banking Survey Series, July 2019.31Layers of protection, American Express, html (accessed January 21, 2020).3233,34“Accounts Payable Automation: The Multitrillion-Dollar Accounts Payable Market is Finally Digitizing,” Business Insider Intelligence, August 2019, utomation-report (accessed January 21,2020).PYMNTS,“The Competitive Advantage of Commercial Card Acceptance,” PYMNTS.com, June 2019, e/ (accessed February 20,35,362020).37Jaime Toplin, The Payments Forecast Book 2019, Business Insider Intelligence, Intelligence.businessinsider.com (accessed February 26, 2020).“Small Business Payment Acceptance: More Payment Options Creeping In,” Mercator Advisory Group – 2019 Small Business Payments and Banking Survey Series, October 2019.3839PYMNTS,“How Commercial Cards Can Deliver On The Promise Of Faster Supplier Payments,” PYMNTS.com, December 2019, -promise/(accessed January 21, 2020).MSTS B2B Buyer’s Report: Why More Payment Options Mean More Purchases,”June 2019, https://discover.msts.com/b2b buyer report (accessed February 4, 2020).40,41LEARN MORE