Whether your manufacturing firm imports or exports globally, an emphasis on working capital can deliver a distinct competitive advantage. According to a recent study, top performing companies can convert their working capital into cash 7 times faster than their peers.1
These top companies also:
- Collect from customers 2 weeks faster.
- Pay their suppliers 2 weeks later.
- Hold two times less inventory.1
Taking a closer look at your international payables and receivables is a great way to unlock hidden cash and enhance your trade relationships.
Analysis reveals $10 million opportunity
The treasurer at a $600 million medical device manufacturing company recently realized that inefficient working capital was not only hampering company growth, but also sending the wrong message to market analysts and investors. More than half of the company’s sales come from international markets. It imports approximately $200 million in goods annually, primarily components and contract-manufactured items from suppliers in Asia.
Anxious to improve their cash conversion cycle and demonstrate stronger value as a publicly traded company, the treasurer contacted his trade bank for ideas. A detailed working capital analysis revealed how company payment practices with Asian suppliers were hurting their Days Payable Outstanding (DPO). Instead of prioritizing invoices by due date and value, with most due net 30 days, accounts payable (AP) expedited supplier payments. This resulted in payments as much as a week early that drained working capital unnecessarily.
With this new insight, the company took a more strategic approach. First, they directed AP to avoid early payments. Next, they reached out to suppliers to negotiate 60-day terms. Knowing these small- and medium-sized companies might object to longer terms, they collaborated with their trade bank to offer low-cost trade payables financing. This unique lending arrangement allows the suppliers to access far more attractive U.S. dollar rates for their receivables — in some instances, 50% to 75% lower — than available credit in their own region. For the manufacturer, it creates a “win-win” situation for both parties.
By paying 60% of their Asian suppliers net 60 days, the treasurer projects they will generate $10 million in additional working capital each year, while simultaneously enhancing their supplier relationships. Stronger performance will also impress their shareholders.
Best practices for manufacturers doing business internationally
For manufacturers of all sizes and industries, a working capital analysis will help you better understand your own performance, as well as how your company stacks up to peers. It compares your current DPO, Days Sales Outstanding (DSO), and other metrics with industry benchmarks. It also lets you test various scenarios that can create a positive impact on your cash flow and working capital.
Other best practices for manufacturers to strengthen your trade-related financials include:
- Internal collaboration. When numerous individuals oversee different aspects of trade relationships, the organization can lack big picture visibility: sales negotiates new markets for exports, purchasing reviews contracts to source raw materials, finance manages cash flow and working capital. Regular communication will ensure all parties work efficiently toward common goals.
- Local market intelligence. In each region where you do business, engage your trade bank for current, actionable guidance on payment practices, regulations, and cultural preferences. Ask about the most effective terms of sale for your specific transactions, and make sure you understand the features and risks of trade instruments proposed by your international trading partners. The more you know, the more efficiently you can operate.
- Interest rate monitoring. Effective trade balances the needs of importers and exporters. Be open to requests and concerns from your suppliers and customers — particularly when international trading partners need to carry receivables for an extended period in a high interest rate environment. Work with your trade bank to help these companies access lower, U.S. dollar financing, which may also enable you to extend your payment terms and improve your working capital.
- Access to state and federal resources. National organizations such as the World Trade Centers Association, the Association of International Credit and Trade Finance, or the National Association of Credit Managers can help you tap into new markets and network with peers. Most states offer additional resources at the regional level.
Analysts estimate that U.S. companies have more than $1.7 trillion in working capital locked up unnecessarily.1 International manufacturers can find a sustainable competitive advantage by shaving even a single day from their cash conversion cycles.
Steven Holt is a vice president and trade solutions consultant with Wells Fargo International Trade Services. Based in Philadelphia, Steven advises Wells Fargo commercial customers on growing their international business profitably and efficiently.
1 The Hackett Group, “2016 Working Capital Survey”