On the cards: process efficiency and working capital management

The latest meeting of The Working Capital Forum discussed the role of purchasing cards in achieving treasury and procurement goals

Corporations have a keen eye focused on working capital and cash conversion, and many have found that purchasing cards can play a significant role in achieving working capital targets. Moreover, P-cards can also help generate efficiencies in transaction processing, as the latest meeting of The Working Capital Forum heard.

The gathering, held at the Dorchester Hotel in September, was sponsored by Bank of America Merrill Lynch (BofAML) and hosted by Mike Hewitt, Adaugeo Media managing director and director of The Working Capital Forum. It again brought together treasury, procurement and P2P (procure-to-pay) professionals from across the industry spectrum.

?Almost without exception, participants were concerned with working capital, regardless of whether they came from the finance side of the organisation or procurement. Sometimes that was driven by recent acquisitions and the consequent need to pay down debt, while for others it was a simple focus on the cash conversion cycle.

Guy Ingram, regional treasurer, Europe, with SABMiller said, “Working capital management is critically important. It’s seen as an indicator of our efficiency in generating cash. We have seen the cooperation between treasury and procurement is vital. We have actually embedded a treasurer in our procurement organisation based in Switzerland to lead that liaison with the team.”

Helen Harris, P2P operational efficiency manager with Dixons Carphone, added: “Bringing together P2P, treasury, finance and procurement people is very important because, with regards to working capital, you cannot work in a silo. You have to have everyone joined up.”

A complementary solution

As the conversation drilled into the issues more deeply, one participant said that the genesis of their P-card programme was the realisation that they had a vast volume of very low-value procurement transactions. They were costly to process through the traditional purchase order process given the invoicing and payments procedure that goes with that. The P-card programme will complement other strategies because it is intended to address the “long tail” comprising transactions worth roughly £5,000 each or less. Transactions worth more than £150,000 may go through the company’s supply chain finance programme, while those in the middle ground may be handled through a dynamic discounting programme.
Another participant talked about the working capital challenges, explaining that their standard payment terms were 60 days, but that they were unable to negotiate such terms with a few of their suppliers. Two possible solutions now being considered, therefore, are to implement a ‘virtual’ payment card programme or dynamic discounting.

Supplier needs

The needs of suppliers came to the fore as one participant said that local suppliers in particular like taking P-cards: “They will get paid instantly but we get 56 days – so they’re delighted,” she said. While suppliers do incur an extra cost for accepting P-cards, that has to be seen in the context of other costs that they would have to incur by having to administer a whole receivables system. “And they can get good business because we restrict the suppliers we can use on the P-Card,” she added.

Encouraging suppliers to accept P-cards may even be easier than expected, because they may already be accepting cards, said Mel Gargagliano, head of commercial cards, GTS EMEA at BofAML. The key part of implementing a card programme is “having the ability to understand who already accepts cards. The key piece of that success is enabling your providers to really look at your suppliers and come back to you to say who’s taking cards. That drives where you focus your efforts,” she said.

Two-way rich data

Information about transactions is increasingly vital. As participants discussed in some detail, cards make it possible for the purchaser to provide suppliers with much greater transparency over payments – rather than the sparse data set typically available via a bank payment. Moreover, if the supplier has Tier 3 data capability, they can also provide a richer data set to the purchaser which is invaluable in offering insight into purchases and greater control over spend and can, in some jurisdictions, offer paperless efficiency gains for VAT filings.

One participant shared his experience where two employees had been misusing their P-cards: “We found those two frauds because we had a reporting mechanism in place to identify fraudulent use – whereas we had no idea what was going on in our paper-based transactional activity.”

Quite a few participants had P-card programmes in place but experience with newer, virtual cards was less common. Virtual cards take the traditional P-card solution to a different level, and can be particularly well suited, for example, where an e-catalogue is being used, using system-to-system communication to generate a unique account number for each transaction.

​Transaction cost research

Dr Simon Templar, a visiting fellow of Cranfield University, will shortly be publishing a Working Capital Forum-supported research report on how supply chain finance is used in different countries in Europe. He said that, having listened to today’s conversation, it could be very interesting to study how companies work out the transaction cost of different types of purchase mechanism – “understanding the cost of using a P-card compared to traditional invoicing, for example – and how do you then segment your suppliers around that,” he said. The participants agreed that that would be a very useful project.

BofAML’s Mel Gargagliano explained how her US and EMEA experience gave her different perspectives on what’s driving growth in P-cards in each market. “Traditionally in the US the P-card was about process streamlining, getting cheques out of the system and making it more efficient,” she said. “In the UK the focus has mostly been about working capital. But a provider can advise on where a client should focus and give insight into ‘the size of the prize’ so you can say where it’s worth dedicating resources.”

Afterwards, Dave Pearce, director of working capital at Imperial Tobacco, provided a useful summary: “It’s great to get people around the table, to share experiences, and get some insight into what’s affecting them in their industry, particularly how payment cards can help to improve efficiency in the business as well as the working capital impact, which is something I’ve got a particular interest in.”