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By Jordan Novak, Managing Director, Business Development at C2FO
In May of 2015, C2FO released the results of a survey of more than 1,000 US business owners’ thoughts on improving working capital efficiency. The survey explored trends associated with financing, working capital deployment and late payments.
In this Q&A, we explore the key questions and analyze how the responses point toward some important insights into buyer and supplier relationships.
Q: Is your business more concerned with financing short-term growth or long-term growth?
A: A majority of owners expressed a desire to focus on financing long-term growth (54%), but 46% consider short-term growth their primary concern. Either way, companies need liquidity to facilitate their present business operations and future plans. This reveals that most companies are just as concerned about financing short-term growth as they are about long-term. The companies doing business with them should also be concerned because long-term financing ensures continual investment and advancement, which leads to efficiencies and cost savings. A company worried about the short term is one at risk.
Q: How does your business currently finance growth?
A: We learned that 57% of the business owners surveyed grow their businesses using cash flow from operations. Perhaps even more telling are the statistics regarding the financing methods that businesses use less frequently. Private funding was the choice for 23% of respondents, 11% said they used a revolving bank line of credit and 4% took advantage of asset-backed loans.
These results reveal the impact of Dodd-Frank and Basel III on small and medium-sized businesses. Almost none of the companies surveyed has third-party financing available to them. The vast majority of the companies still fund their businesses organically. As buying organizations pressure these companies with longer payment terms, the need for financing will become a necessity.
Q: Do your customers regularly pay your company’s invoices on time?
A: Almost 20% of the companies surveyed said their buyers regularly paid their invoices later than expected.
The results of our survey are in line with what we would expect, despite recent surveys by other organizations that have revealed numbers over 50% for late payments. While we agree that those numbers are overstated, the fact that suppliers are paid late on 1 of every 5 invoices is still cause for concern. Collections can be a resource-intensive process that adds cost to any transaction. Add that to the cost of financing (which we know is fairly high based on this survey) and you have rapidly escalating pricing.
Q: If you have appropriate access to working capital, how would you most likely deploy it?
A: The answers to this question get to the heart of the need for adequate cash flow for businesses. Ninety-five percent of the business owners surveyed would reinvest in operations if they had more capital. Their top 3 priorities were purchasing equipment and inventory (25%), advertising or marketing (24%) and investing in employees/hiring (21%). Another 13% of respondents had an interest in using additional working capital for expanding operations, and 12% would invest in new technologies.
We know from the financial crisis of 2008 that the impacts of liquidity shortages were instrumental in elongating the recovery. Economic growth is dependent on advancements and efficiency, which are only driven by investment. The surveyed companies understand this, and our results reveal that improved liquidity would indeed lead to direct investment. We see this every day as companies with the best intellectual property and highest margins tend to pay their suppliers very quickly. This practice encourages investment and is a key reason for their expanding businesses.
Q: When deciding which customers to do business with, how important is it that your customers offer supplier-friendly accelerated payment options?
A: This is the source of the 56% figure cited earlier. The fact that this is a consideration for any company tells us how far companies have pushed their payment terms. In the US, DSOs are now over 42 days on average. That is up nearly 10 days just in the past few years. The results show that this is having an impact on business decisions, and early payment programs play a part in where companies deploy their resources.
The findings of this Working Capital Outlook point to a new reality for small and medium-sized businesses in the age of Dodd-Frank and Basel III. The results outline how difficult it has become for these companies to obtain revolving lines of credit and loans from financial institutions. While we have expected this, the speed at which this new reality has arrived is of concern to the owners and employees of these businesses. Domestic economic growth hinges on small and medium-sized businesses, and it is clear that large enterprises have an opportunity to contribute to this growth while reducing supply chain risk and cost by making early payment more accessible.