Reported by: banking|Updated: July 29, 2019
Stay close to the customer. While it sounds almost cliché, I am often struck by the unique perspectives I gain from my customer experiences. Any entrepreneur or business leader will appreciate that running a business is about rotation of money and cash flow. The more financially savvy folks call it the cash-to-cash cycle. A customer recently narrated a business need he was able to fulfill using advanced early payment platform he has access to. The gentleman concerned runs a small-scale sheet metal processing unit near Pune and is a supplier to many Indian engineering and consumer durable companies. Pricing of sheet metal, a commodity, is subject to fluctuations based on supply-demand scenarios and volume of purchases. Having operated in the commodity business for decades, he was well aware of the spot opportunities that arise to build inventory at a lower price point. Previously, he did not have the ability to generate cash at a short notice to capitalize on such spot pricing opportunities. With access to digital tools and progressive fintech platform, this savvy business owner was able to leverage his receivables, convert them to cash by sacrificing a small discount and then put the cash to work in a profitable manner by investing in inventory.
The above experience illustrates the strides the fintech world has made to solve real world business needs. Imagine a world where companies ‘name their rate’ to access cash flow, according to their own unique circumstances, timing and comfort levels in a manner that benefits the entire supply chain. Welcome to the world of flexibility.
Indeed, India Inc no longer manages its business under a set of clearly defined parameters with easy-to-follow rules. Day after day, we are in a tug of war with our competitors over market share or impromptu planning sessions set off by changes in the macroeconomic or political landscape. Nearly everything we seek to control is often under the influence of that which we cannot control.
Talk to any CFO or treasurer today and you will notice a consistent pattern – that flexibility and convenience in financial management tools are two of their most prominent requirements. While business leaders are often pressed to launch the next successful product or find a new revenue stream, our financial leaders are tasked with the complex challenge of sourcing capital to kick-start and drive those initiatives.
Many working capital tools – banking products, vendor finance programs, factoring options, and even peer-to-peer lending – are common to us all. Each of these funding sources is uniquely positioned to enhance one’s capital position in a particular manner, and likely does well under the circumstance.
But what happens when the business needs change or when the trade winds shift and you find yourself in a position where your working capital approach is unlikely to deliver on performance for the month, quarter or year? Or, consider the lucky few who know the regular peaks and flows of their working capital and know when change is coming, but have no way to adjust their tools to maximize overall performance when the actual time comes.
This is the case with many CFOs and finance teams I meet across the country. It is a fact that finance leaders use myriad solutions to manage their working capital, but each has a specific drawback that limits its opportunity for real bottom-line improvement. Reasons vary from paperwork requirements, process timelines, debt covenants, vendor program participation costs, and even accounting and tax treatment.
What many finance leaders are seeking today is the ability to change the course or choose a solution depending on their business needs and at a moment’s notice. In light of the IL&FS crisis, many treasurers confided to me about their predicament of being caught unaware as they helplessly watched the returns from so-called liquid funds take a knock to the extent of 50 per cent of the fund’s average annual returns of 6-7 percent. Now imagine if the same treasury team had access to flexible solutions that could have seamlessly channeled surplus liquidity to their supplier ecosystems in a mutually beneficial risk-contained manner. The anecdote I shared at the outset is a good example of how flexible solutions work.
Businesses operate in a complex web of partners, customers and suppliers. Technology plays a crucial role in successfully replicating these real-world networks into a digital network of financial transactions. Armed with technology, data and networks, today’s finance teams across the world can devise and implement working capital solutions that control every variable in their businesses such as short-term investment strategy, balance sheet and working capital metrics or customer concentration risks.
The future is already here. We are already working with enterprises to help them rethink their approach to working capital by leveraging strategies that enable full optimization of their financial performance. Incremental changes in their current approach coupled with financial technology have allowed enterprises to complement their existing portfolios of traditional working capital tools, and be rewarded with EBIDTA growth and margin improvement, in addition to accolades for innovation.
As more companies look to gain control over their performance metrics, we will continue to see the adoption of flexible working capital solutions that help financial leaders adapt to a constantly changing landscape. In the near future, I see more than half of all corporates mandating flexible solutions as the core of their working capital tool-set. These dynamic solutions will be the only means to adjust to the change in tides.
Pradeep Gode is country head, C2FO India. He partners with corporates to optimize the performance of their working capital