In an interconnected world, global factors can affect local businesses more directly than ever before. Whether it is the US-China trade war affecting global supply chains1, Basel III regulations having their impact on liquidity and funding2, or cross-border acquisitions increasingly integrating the supply chain3, businesses are affected by these changes in demand-and-supply patterns, potentially resulting in shrinking margins.
In the MENAT region, particularly the GCC, where GDP growth is driven by large government projects and funding4, working capital management requires a long-term view to protect liquidity.
At a time when oil price fluctuations have become the norm, diversification is essential for business growth. Whether it is geographic diversification, or seeking cross-border growth, businesses need liquidity so that they can increase their network, distribution and reach to a greater number of markets in order to expand. Rationalising liquidity is critical so that a business can derive maximum value from available cash.
Small and medium-sized enterprises (SMEs) and mid-market enterprises (MMEs) face challenges in accessing affordable funding. Effective cash management is a route to access funding at more competitive costs. Lenders, investors, credit rating agencies and customers take into account how efficiently the company is able to manage its cash. This efficiency is directly tied to a business’s ability to generate funding. In effect, good cash management paves the way for better and cheaper capital solutions.
Increasingly, businesses in the region are utilising responsive technology, banking products and better processes to better manage and control cash flows. In a region where company founders are typically more experienced than their global counterparts5, more and more entrepreneurial ventures are successfully applying strategies and best practice implemented by larger companies to realise greater benefits regardless of company size. Rationalising liquidity is one area that is getting more attention. This is being done using one or a combination of strategies.
Enhanced visibility of cash flow
Implementing digital solutions across the value chain is increasingly being seen as more cost-effective in the long run. Whether it is the day-to-day transaction management, or a dashboard that travels with you, entrepreneurs are increasingly relying on digital solutions. A company may maintain multiple bank accounts across different countries and currencies, which can be problematic for the quest for visibility over cash. Lack of automation has long been cited as a problem in ensuring real-time information on cash flow. A 2018 survey found greater satisfaction with cash forecasting among those who use automated solutions compared to those who primarily use spreadsheets6.
Managing your liquidity on the go is one of the ways to exercise control over banking operations even while operating from different countries. Keeping a digital finger on the pulse of receivables, payments and accounts balances in various geographies can empower better business decisions.
Digital processes improve control over cash compared to, say, cheques, which may be banked within a prolonged period after it is issued. Cash-flow forecasting using digital solutions also improves supplier relations by enabling on-time payments, with no disputes. Suppliers also get notified on payments and can track payment status from release to receipt.
Real-time visibility of the liquidity position can enable improvements in cash management, since businesses can put idle deposits to use by investing surplus liquidity.
Supply chain financing
Suppliers who have relationships with larger buyers can benefit from supply chain financing as it allows them to cash in on the credit standing of these large companies. Usually, bigger suppliers have greater bargaining power, giving them access to cheaper credit at better terms. With supply chain financing, smaller suppliers can obtain credit at better terms, since business banking will take into account their buyer’s profile and credit standing while providing the finance. Suppliers can get cheaper funding while buyers benefit from cost efficiencies, such as not having to issue letters of credit. This saving too gets passed on down the supply chain.
If the supplier and the buyer are on the same platform, the invoices from the supplier to the buyer can be linked directly, and updated information is available easily. This also reduces paperwork and allows for better inventory planning.
Case studies show that significant reduction in the accounts payable workload and better supplier relationships in situations where such solutions are implemented7.
The business banking landscape is evolving from paper-based payments to card-based and digital payments. The speed at which a business can receive money from clients can be a crucial differentiator. Businesses today seek solutions that allow them to provide flexibility to their customers to pay how they want – digitally, through a card, or via cheques. Efficiency in cash management is enhanced by platforms that provide the means of collecting outstanding payments through multiple modes at the fastest speeds and the lowest possible costs, with reconciliation at the backend ERP system.
Any broken links in the chain means that invoices are not matched against payments and a business does not have a clear view of its working capital. A good solution, whether customised locally or implemented off-the-shelf, needs to provide information on each payment – from whom, against which invoice, whether part or full. Making sense of the transaction complexity is critical.
At HSBC, receivables solutions enable collection and payment, and provide an interface for the client to talk to the bank. A purchase processing solution by a financial institution enables businesses to address cash flow challenges by ensuring that they get receivables quickly instead of waiting for 60 to 90 days, depending on the terms of the contract. If the receivables are taken over by the bank, the business has more cash to put into the business.
Making payments seamless
A crucial part of cash management is to make payments on time and easily. Whether it is government taxes, payments to port authorities to clear shipments, salaries, vendor payments or utility payments, businesses are building efficiencies into their payment processes so that they can be handled seamlessly.
With digital solutions, payments continue unhindered even when the authorised signatory is travelling and signing cheques is a challenge. A digitised payments process allows greater control. Using app-based solutions, businesses can make payments using their smartphones.
At the top of the technology totem pole today is the use of technologies such as blockchain. A recent example is that of a Dubai-based family retail business using complementary distributed ledger technology to complete a transaction. Advantages included reduction in overall transaction time by 40% and significantly reduced use of paper trails in the retail supply chain at multiple touch-points8.
Implementing flexibility with cards
Commercial card use is on the rise in the MENAT region. These can be used for anything from vendor payments to VAT and Customs clearing, with an interest-free credit period. These come equipped with a reconciliation piece, which means that a clear view of customer card programmes, allocated limits, real-time outstanding and available balance and controls.
They also provide visibility of all transactions, with relevant details such as value, date, merchant, origin of transaction, as well as level three data such as VAT and invoice number.
Virtual card and account solutions are also increasing in popularity since they eliminate the need of issuing cheques and purchase orders. They tie in very well with reconciliation when a large number of payments are being received, in, say, a school, or in the travel sector. Virtual accounts can help schools match each payment against the student.
In the travel sector, making payments to hotels or airlines through cards is a very effective way of managing working capital. With commercial cards, it is now possible to make foreign currency payments as well.
Virtual cards work digitally and can be changed for each transaction, making them secure for use by employees without fear of misuse, since it is possible to restrict their use to specific merchants or vendors and / or cap the transaction value.