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Getting working capital to work for you

Expense insights

How combining shrewd company credit card use with your expenses management system boosts cash flow and protects you from ‘growing broke’

If there was ever a misnomer, it’s ‘petty cash’. There’s nothing petty about cash. Having a healthy cash flow, or working capital, is essential to the overall health of your business.

It’s no exaggeration to say that letting working capital erode is the death knell of even successful companies.

This is even more concerning when you realise how easy it is to lose control of your working capital just in the day-to-day running of the business.

Introducing credit cards for expenses can seem like an expensive way of paying for incidentals and consumables but managed correctly, they can actually boost the overall profitability and procurement effectiveness of the company.

Extend your invoice period

Borrowing in credit is expensive. But that is only if you leave balances to run unchecked for months. Negotiating longer term credit card payment terms is in fact a fantastic way to extend your credit period whilst paying your suppliers on time, keeping great supplier relations and most importantly cash in your business for longer.

Essentially, using a credit card extends the cash conversion cycle, shortening the time between the company losing cash in hand (by paying for supplies) to gaining it back (when the company’s customer pays for its services).

If a typical invoice is 30 days, the company is under pressure to make enough sales within that 30 days to keep the conversion cycle short. Credit card terms are also typically 30 days (or longer), effectively doubling the time the company keeps hold of working capital or in other terms, halving the cash conversion cycle.

Managing the cycle

While using a credit card is simplicity itself, particularly for the employee using it, it’s only a small part of the solution. In anything other than the smallest company, the CFO is overseeing the use of tens if not hundreds of cards as well as other payment types and all the while they are trying to keep one eye on working capital.

An expenses management system (EMS) is vital for keeping control of all the moving parts in the process. Strategic Finance magazine noted that “few companies have a formal improvement program with clear ownership across the organization, or, worse, they lack the tools and the capabilities to implement such a program.” Keeping on top of invoice dates to maximise the term period and tracking card payment schedules to make sure no interest accrues is a full time job in itself.

If proof were needed as to the value of keeping cash as king, PWC Australia created an excellent equation based on Days Payable Outstanding (DPO) for creditors to demonstrate just how much value can be created by managing your expenses payment schedules:

Days payables outstanding (DPO) = Accounts payable/cost of sales x days in period.

Importing business: Cost of goods sold = $40m
Accounts payables balance EOY = $2m                                                                                 $2/$40x365 = 18 days DPO
Increase DPO by 12 days to 30 days.

Potential to free cash (DPO) = (cost of sales/days in period x target settlement terms) - existing accounts payable balance.

($40,000,000/365x30)-$20,000,000=$1,287,671.

Setting accounts payable to 30 days instead of 18 frees up almost $1.3m in cash.

However, PWC also notes that you do have to adapt the above formula to your own company’s expenses philosophy. Some want to stretch creditors as far as they can; others will pay quickly to hopefully benefit from the good relationship they establish by doing so.

But on the other hand, using company credit cards and an EMS together to manage this process, you can do both. Nothing like having your cake and eating it too!

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