All companies strive to increase their working capital, either by reducing the need for it or by increasing its flow from existing operations. Best-in-Class companies excel in this regard as shown in Figure 1, which compares the Cash-to-Cash cycle for the Best-in-Class to that of their competition.
Figure 1: Best-in-Class Working Capital Advantage vs. All Others
Best-in-Class companies have a cash-to-cash cycle that is half as long as that of their competition. This accelerated access to working capital from operations can provide funding for acquisitions or capital equipment, as well as reduce the dependence on borrowing, resulting in fewer interest payments and a positive P&L impact.
When thinking of their supply chain, most companies immediately zero in on inventory reduction as a means for increasing working capital, since this reduces the capital employed and is therefore always worthy of discussion. However, this approach is not “new news.”
What most companies do not even consider is the untapped opportunity in leveraging their freight spend to increase working capital. The companies that have adopted this approach have seen their working capital grow as a result.
The key is that some banks who offer Freight Audit and Payment services may also offer Trade Financing. This can increase working capital for both the shipper and the carrier, while also improving the shipper/carrier relationship. Freight spend itself commonly ranges from 3%–12% of revenue, making it a large untapped resource for working capital improvement.
Over 80% of the Best-in-Class companies (top 20%) outsource their freight. The real surprise is the high percentage of All Others (remaining 80% of the companies) who choose not to outsource their freight audit – less than 50%. Of that percentage, even fewer use a third party for the settlement process, which is where the trade finance solution option can solve so many problems for the shipper and carrier.
How? Most negotiations with carriers, when handled directly, cover payment terms, as well as the cost of the service being contracted. However, where a bank can offer trade financing, these payment terms can be eliminated from the discussion. The carrier can get paid immediately or at least within a few days. The shipper can extend their “Days Payables Outstanding” (DPO) to as much as 90 days, adding two or more months of working capital for the freight component of their total spend and related cash flow.
The net result:
- Carriers, who need cash to fund operations, get paid faster (within five days).
- Greater working capital for the shipper, who may be facing mandates to extend out their credit terms with suppliers. The extended payment terms can be as long as 90 days without renegotiating rates.
- In addition to the financial benefit, trade finance takes the stress out of the relationship between shippers and carriers over payment issues, and allows them to focus on the business. In addition to the financial benefit, trade finance takes the stress out of the relationship between shippers and carriers over payment issues, and allows them to focus on the business.
Leveraging total freight spend to improve working capital through a trade finance solution is an untapped opportunity for the majority of companies. With freight spend ranging from 3%–12% of revenue for most product-based companies, this approach could significantly improve working capital, but most organizations do not leverage their freight audit and pay solution partner to provide trade financing for their total freight spend. Lack of awareness of the opportunity, and lack of visibility into the actual size of the freight spend itself, are the two main reasons for the “call-to-action.” Companies should act now to increase their company’s working capital, by leveraging freight spend and partnering with a freight audit and payment provider with trade finance capability.