As the cost of doing business keeps pace with higher-for-longer interest rates and elevated inflation, managing working capital effectively has taken on added importance. Maximizing on-hand cash, while also collecting on outstanding receivables as quickly and efficiently as possible, is a tricky but necessary balancing act. Mastering it may require a willingness to invest in digitization.
“Staying on top of payables and receivables can be a challenge at the best of times for any business, but doing it well becomes even more meaningful in the current economic climate,” said Tom Lang, head of Treasury Management Product and Operations at PNC. “Integrated digital solutions can offer tremendous value by helping businesses realize efficiencies, not only in terms of back-office treasury processes, but also in optimizing and maximizing available working capital.”
What Is Working Capital?
Working capital is a measure of liquidity. It amounts to current assets (including cash, accounts receivable, and inventory) minus current liabilities (outstanding debts and accounts payable).
The strategy behind managing this liquidity is to reduce days sales outstanding (DSO), or how long it takes to collect customer balances, while also extending days payables outstanding (DPO), or how long it takes to pay suppliers. The ultimate goal of this approach is to gather funds more quickly and hold onto them longer, while also optimizing inventory and other operating costs.
Efficient, Interconnected Treasury Processes
Having an integrated, automated approach to treasury operations is critical to optimizing the cash conversion cycle. Businesses can benefit from interconnected solutions that assist with the full spectrum of working capital management, from the order-to-cash (or DSO) stage all the way through to procure-to-pay (DPO).
By focusing on the end-to-end order-to-cash process, businesses can create a fully integrated receivables approach that streamlines customer billing and automates cash application to reduce days sales outstanding. Businesses should consider solutions that help accelerate the payment collection cycle, reduce processing costs, and mitigate risk. These may take the form of tools and platforms that digitize the process of sending invoices and receiving payments, as well as integrate and expedite the cash collection process, such as through PNC’s Integrated Receivables solution.
In terms of payables, the goal for businesses is to find a way to increase efficiency, visibility, and control to improve DPO. Digital tools can play an important part in helping businesses extend the payment cycle, while also reducing processing costs and reducing risk. Automated solutions, such as Intelligent Routing, Integrated Payables, or an invoice automation solution, can help businesses lower processing costs and control the timing of the release of funds. Card services may be another appealing solution, as flexible billing cycles and payment options can create a natural extension of payment float.
Working Capital Management in Action: Vontier Corporation
One business that has found success in actively capitalizing on the benefits of a card solution is Vontier Corporation, a global industrial technology company focused on transportation and mobility, based in Raleigh, North Carolina. Prior to launching as a standalone public company in 2020, Vontier was part of a parent entity that leveraged a procurement card program. Familiar with the value that the card solution offered in managing working capital, Vontier decided to implement its own procurement card program. The company worked with PNC to develop a customized card program of virtual cards for vendor payments and individual credit cards for employee travel and entertainment expenses. One critical feature of the solution is that it allows for extended payment terms, which is essential for helping Vontier prolong the payment cycle and increase DPO.
“Effective working capital management is critical for meeting short-term obligations, but it also has longer-term implications for businesses, particularly when contending with high interest rates. Businesses need to be thinking strategically about how to manage their cash in this higher-for-longer interest rate environment. While higher rates make the cost of borrowing more expensive, they also lead to higher yields for deposited and invested cash, so finding ways to capitalize on that while also funding immediate business needs is an area of opportunity,” said Lang. “Companies that are able to maximize their positive working capital, like Vontier Corporation has been able to do, may be in a good position to invest in future growth.”
Ready To Help
PNC’s team of treasury specialists is available to unlock business potential, navigate new technology, and overcome the challenges that come along with digital transformation. No matter the company's industry or size, PNC Treasury Management platform solutions are flexible in scope and geared towards driving measurable results and improving key performance indicators. For more information, reach out to your PNC Relationship Manager, or contact us.