14 Sep 2018
13 Sep 2018
While most printers are familiar with day-to-day cashflow, many aren't so well-versed in the implications and management of working capital
Unlocking working capital can benefit your businesses in a number of ways, but it's not always well-understood. Michael Walker looks at the figures.
There are a number of business-related aphorisms floating around the print industry, such as 'turnover is vanity, profit is sanity' but the one that applies pretty well everywhere is 'cash is king'. Yet while most printers are only too familiar with day-to-day cashflow and the problems that it can bring, many, especially in mid-sized and smaller business aren't so well-versed in the implications and management of its cousin, working capital.
Put most simply, working capital is defined as the business's current assets less its current liabilities. While many small print business owners will tend to think first of premises and equipment as assets and staff wages and finance commitments as liabilities, these are relatively static items that are planned for over periods of months or years. Understanding working capital is more concerned with the money that's tied up in short-term assets such as stock, work in progress and customer invoices, and liabilities in the form of supplier invoices and other costs of production and so of course can change very rapidly.
If that all still sounds a bit dry, David Bunker, assistant managing director at Close Brothers Asset Finance, also puts it this way: 'Cash is a function of accounts payable, receivable and inventory or stock. In other words, it's about the key human relationship between the suppliers to the business and the customers who pay the bills.' He also emphasises 'A business needs to understand its cash flow, no matter how large or small. It has to become part of the culture of the business and not just something that "accounts" do.'
Mark Nelson of Compass Business Finance puts it more bluntly. 'You could trade profitably but lose cash every month. Printers go bust because they run out of cash. You have to focus on cashflow in a print business, especially with the market as it is. It's been a turbulent year so far, the economy has plateaued and there's no great confidence to invest.'
Jenny Shutt, associate director, business consulting at Grant Thornton, agrees: 'At any stage in the business lifecycle, cash may be required and to generate this through optimising working capital performance is the cheapest source of funding, otherwise you have to borrow. The best way to generate cash is by optimising the end-to-end working capital cycle.'
So how can you get a better grip on this ephemeral phenomenon and make it work for you?
Ms Shutt breaks it down into three concurrent cycles: "order to cash", which deals with accounts receivable; "forecast to fulfil", focusing primarily on inventory management for production; and "procure to pay" which is supplier-facing and the mirror image of the order to cash. The model she uses breaks each of these down into a number of stages or processes and highlights inter-dependencies between them - stock procurement depends on order forecasting, for example - but in smaller companies many of these stages are handled by the same person and not necessarily seen as discrete steps. More important than following a detailed breakdown of the processes that might be split between large teams in bigger enterprises, though, is to spread the understanding throughout the business of the impacts that particular decisions can have.
Mark Nelson of Compass - use released working capital to fund new ventures, acquisitions or difficult-to-finance kit
Cost of sales
'Sales or commercial directors are usually incentivised for achieving the sale, it's all about revenue, but they might not understand that agreeing 60-day payment terms has an impact on the cash and working capital position,' says Ms Shutt. 'Growth focus is on revenue or margins but it's important to create awareness and embed a cash culture.'
The benefits of doing so relate to the cost of borrowing. Ms Shutt gives a simple example - if the cost of borrowing is 10% on a £100,000 facility, releasing that amount into the balance sheet would also save £10,000 in charges, so there is a P&L impact as well. And since the cost of borrowing is related to a firm's credit rating, a strong working capital position is only likely to help this. 'Banks will often want to see an improvement in working capital before lending more because it represents lower risk for them. We work with clients to find ways to make sustainable improvements in performance,' she says.
One of the levers that printers can pull is to offer invoice discounting for prompt or early payment. Another positive action is simply to get the invoice right first time, whenever it's done in the order to delivery process. In e-commerce set-ups it's usual to take payment in advance in consumer sales, or to auto-generate and issue invoices as the orders are received from account-holding customers in B2B situations. Look at your stock levels too. 'I've often encountered businesses that hold too much stock without much explanation. This is just tied-up cash,' says Mr Bunker.
Supply chain finance or "reverse factoring" is another option. 'It extends the accounts payable balance,' says Ms Shutt, explaining, 'You could move to 60 days but your suppliers are still paid on 30.' There's obviously a finance cost to this but if it better helps to match your customer payment terms - which you may not be able to control - it may be worth it and is far better in terms of maintaining supplier relationships than becoming a late payer. This is particularly relevant for digital printers whose consumables supply is often controlled solely by their press vendor with no alternatives to go to in order to try and gain some extra credit; an HP Indigo user went out of business recently for being behind on payments to the vendor, who stopped supplying toner as a consequence.
By the same token, you may inadvertently be an early payer - albeit by only a few days - if you do a weekly payment run. Ms Shutt says that in her experience most companies do this despite thinking they don't and that fixing it is a 'quick win'.
Grant Thornton's Jenny Shutt - it's important to create a cash culture
Measure to manage
Another pertinent business adage is that 'what can't be measured can't be managed'. Keeping track of your working capital and cash position should therefore be one of your business's KPIs (key performance indicators). While you might hope that a print MIS could help with this, they are typically more production-focused; ERP systems are more likely to contain the necessary data and may offer dashboards to help keep track at-a-glance but they're also often too expensive to be found in smaller businesses. However, mainstream accounting software will usually offer something like this and Mr Bunker suggests that smaller businesses could get their accountants to create a simple reporting tool to keep an eye on the cash cycle.
He states the equation for the cash conversion cycle (CCC) as days inventory outstanding plus days sales outstanding minus days payable outstanding. 'We would suggest sitting down with an accountant and asking them to set up a simple reporting tool so this can be tracked,' he says. 'If you had a weekly or monthly CCC chart then you could see visually whether the business was on track, improving or whether action is needed. We've seen some very good businesses fail due to just spotting issues too late and a profitable business get crippled with poor cashflow management.'
While a lower number of days between paying and being paid is always desirable, it can't always be achieved, for a variety of reasons. Mr Bunker says that paper merchants are currently reducing credit terms as their insurers are nervous about the industry, for example. 'Talk to your suppliers, review your account with them,' he advises, adding, 'there's lots of opportunity to improve the amount of credit available.' He also notes that the shorter runs associated with digital print lend themselves better to cashflow optimisation but warns that the increased number of jobs means that some sort of invoicing automation is desirable to keep up with it.
Other reasons that the cash cycle may be stretched could be positive, as a result of investment to improve facilities or capacity. 'It's always helpful to at least plan for more cash than expected when investing. Other activity can need even more cash; moving a press or factory is always an issue down to sheer delays and downtime,' suggests Mr Bunker.
The short write-down cycles associated with cheaper digital presses can also be more demanding of cash but he says that choosing vendors whose products are designed to be upgraded over time and thus kept productive for longer can help here. Another issue might be finding deposits to secure or reserve new equipment: 'In most situations this cash is best left in the business to support trading. [We] can use existing assets that are unencumbered to provide the security for a no deposit deal or to raise the deposit needed,' he advises.
Mr Nelson points out that most digital kit is rented so the costs are accounted for in the cashflow and thus you do see a true position from month to month - provided you look. He also comments that while one use of working capital could be to support routine capital investment or to pay down existing debt, 'You could invest in another area - buy kit that you couldn't finance, buy software or another business. It's not just a question of do you need to raise working capital, what's it to achieve? Would it create a better business or unlock synergies?'
Since no one is likely to say no to a better business, it's only sensible to keep on top of cashflow and working capital, so keep counting the pennies.