American Express: Hardworking capital – Brendan Walsh
The credit crisis has caused many companies to take stock of how they fund their growth. Brendan Walsh of American Express explains how taking advantage of new working capital management solutions can lead to significant, low-risk competitive opportunities.
Cash is integral to any business, even more so since the financial crisis. Many companies are realising that better management of working capital through operational measures or renegotiation of contract terms with suppliers can free up much-needed liquidity, which can in turn be invested back into growth.
According to Brendan Walsh, senior vice-president and general manager at American Express, this re-evaluation of working capital management is not just focused on cash.
"We have been living through a time where cash is king," he says. "But we have found that companies are looking at working capital and processes around its management in a much broader form than just cashflow. They are increasingly focusing on ways to lower processing costs, reduce the risk and cost of funding, and explore ways in which balance sheet ratios can be improved."
There are obstacles to achieving these goals. The reduced desire on the part of banks to offer credit and a raft of recently introduced legal and market-based restrictions has limited the use of working capital management solutions. In addition, many available levers can prove detrimental to either the buyer or supplier, as they are often centred on the redrafting of payment terms. With this in mind, American Express has been developing a new set of tools.
Under this new model, American Express takes responsibility for financing a buyer's payment terms. The buyer makes the payment using one of the company's products, once the goods or services have been delivered and the invoice is received. The buyer then has 58 days, or more, depending on the date the supplier submits the charge, to settle payment directly with American Express. This helps customers to take greater control over their accounts payable, maintain liquidity and improve cashflow.
"In this environment, where credit can be somewhat constrained, buyers are often looking to delay payment as much as possible while suppliers are looking to be paid more quickly," explains Walsh. "If you were dealing with a supplier that you were currently paying in 30 days, we would come up with a solution that extended those terms. Essentially, it would mean that we provide you with an alternative funding source to cover your payables, which improves operational cashflow, and your supplier gets paid sooner. It's a win-win situation."
These benefits can be manifest in different forms, depending on the customer's requirements. The bridging role played by American Express is supplementary, and has no negative impact on a customer's main banking relationships.
"We have a number of working capital solutions, whether it's corporate or purchasing cards, business traveller accounts or our latest offering vPayment, which is a virtual card product," Walsh says. "If a company comes to American Express to use one of these tools, it can be viewed as an alternative or an additional source of funding for that business. Clearly American Express will do the underwriting, the credit checking and we'll apply the spend limits. But whatever limit the customer has with their bank can be maintained."
Ultimately, using such tools has been shown to result in lower borrowings, improved profitability and, significantly in Walsh's view, an easing of traditional tensions between buyers and suppliers. The findings of an American Express study suggest that working capital management solutions will become increasingly popular because of these advantages.
In addition, a report by Ernst and Young revealed that in 2010, nine European countries reported an improvement in working capital performance. But with 2011 set to be impacted by the lag effect of higher commodity prices, the need for good working capital management will only grow. Also, a total of 85% of those surveyed as part of the 2011 European Payment Index by Intrum Justitia cited financial problems on the part of the buyer as the main reason for late invoice payment, with 47% reporting reduced liquidity due to the global recession.
"It's fair to say from surveys that have been conducted that effective working capital management cannot be ignored," notes Walsh. "By and large, companies have done
a good job of preserving cash. What they are focused on now is taking a broader view of working capital management.
The fact is that it can be a huge win in what are quite difficult times."