Chief financial officers are facing pressure to reexamine the sources of cash in the corporate coffer — and how that cash is used, Darren Parslow, global head of Visa Business Solutions, noted in a recent interview.
“Everyone’s calculating the cost of capital,” Parslow told PYMNTS’ Karen Webster, “and calculating the cost of working capital, too, and working out exactly what tools they’ll deploy in 2024, and how they’ll do so.”
The conversation came as Visa launched its Growth Corporates Working Capital Index in collaboration with PYMNTS Intelligence, an undertaking that offers a deep dive into the relationship between how CFOs use working capital solutions and the operational efficiencies — and growth — gained.
Growth Corporates are businesses with top lines between $50 million to $100 million and $1 billion. And Parslow termed them “the Goldilocks of businesses — they’re a little too big for small business working capital solutions or small business banking. But they’re a little too small for enterprise and corporate wholesale banking.”
The onus is there for Visa and its banking and enterprise providers to offer up a broad range of working capital solutions for Growth Corporates, thus far underserved in their efforts to manage cash flow with aplomb. But they’re just right for working capital optimization with the aid of virtual cards and other digital innovations.
Parslow noted that “more and more bankers — and more of our clients that we’re talking to — are interested in this segment” as they seek to help their end clients achieve more top-line growth out of their operations.
The Working Capital Index tracks firms across five sectors, five regions and 23 countries — touching on fleet and mobility, marketplaces, healthcare, agriculture, commercial travel and online travel. The more than 870 executives interviewed offered up a range of opinions and observations that show how they balance daily operations with the cash flow needed to underpin those operations — and manage their long-term strategic roadmap, too.
There’s growing recognition in the C-Suite that working capital solutions, via the cards mentioned above and loans, must factor into any strategic consideration. The data shows that 80% of CFOs who did not use those solutions last year plan on doing so in 2024. Uncertainty over the macro environment reigns, and the best way to deal with uncertainty is to have financial firepower ready.
There’s a mindset shift that’s occurring, said Parslow, to bring more bankers and corporations into the fold to use working capital as part of a planning process rather than resorting to overdrafts or lines of credit.
“You want to buy inventory when it’s the right time for you — rather than when you have to do it,” said Parslow.
The report shows that the most efficient users of working capital had the lowest DPOs on hand — which measures the time it takes a company to pay its outstanding bills and invoices. The quicker the turnaround, the stronger the company and the better relationships it’s been able to strike with its suppliers. The report details that the better performers with lower DPO are 34% more likely than bottom performers to have used external working capital for strategic purposes. The positive impact is accrued to the bottom line because, by shaving five days off DPOs, companies can save more than $3 million tied to annual accounts payable costs.
The “virtuous circle,” described by Parslow, which cuts across all industries and regions, is one where companies can pre-pay suppliers, have better inventory management and even work out better contracts with those suppliers. This multiplier effect improves entire supply chain ecosystems within a given vertical.
There are, of course, some cultural/regional differences in how companies are leveraging working capital, Parslow said. In Latin America for example, invoice financing and factoring are options of choice.
And of the CFOs who didn’t use working capital solutions last year, most were located in EMEA and Asia Pacific. In many cases, especially in emerging markets, banks don’t have the credit policies in place to extend working capital options to their growth customers.
“There’s been a bit of a ‘desert’ in some markets,” said Parslow, “in terms of working capital availability.”
Technology, he added, is leveraging the playing field a bit. The issuance of virtual cards is likely to grow by triple digits through the next few years as more CFOs engage in an “open dialogue” with Visa on how to combat the vagaries of the high cost of capital and the (somewhat) limited options that might be in place in the Growth Corporates’ home markets.
“The environment is forcing them to look at different choices,” Parslow said.
From Visa’s vantage point, he said, “We’re really going beyond what has been a traditional virtual card or additional card platform and we’re really thinking through what a kind of automated credential looks like that carries a certain price point and a certain term.”
As Parslow noted to Webster, “The main sound bite here is that there’s room for improvement … it falls on us, our bank providers, our non-bank providers, the corporates and the CFOs to use working capital strategically and with a growth mindset.”