Two-Thirds of Middle Market CFOs Use Working Capital to Grow, Not Tread Water

There are many ways to use working capital — to buy inventory, pay suppliers or fine-tune operations.

These are the strategic uses of money to help a business anticipate and satisfy market demand and grow.

Then there are the uses that are ad hoc, sometimes unplanned, tactical — and might arise on a moment’s notice.

Visa’s 2023-2024 Growth Corporates Working Capital Index, with research from PYMNTS Intelligence, found that more Growth Corporates use working capital solutions to fund strategic growth initiatives and expected gaps than to cover unplanned cash flow shortfalls.

Drill down a bit, and for these Growth Corporates — companies that log annual revenues of $50 million up to $1 billion — there is some division between strategic and tactical uses of working capital.

The data showed that the majority of Growth Corporate CFOs used external working capital solutions for strategic growth purposes.

Another 34% used it to cover expected cyclical shortfalls and manage seasonal gaps. There is further bifurcation of how different verticals use working capital.

Overall, 70% of all users saw improved business metrics as measured by lower days payable outstanding (DPO), lower cash conversion cycles and higher working capital ratio. These metrics can be used as measures of a firm’s liquidity and operational efficiency, and they reflect its capacity to meet payment obligations.

Accessing working capital solutions for strategic growth purposes is associated with a 33% increase in the probability of improved DPO, compared to using it to cover unplanned cash flow shortfalls. The top performers in the index saw an average DPO of 46 days, better than the 50 days in the average sample and better than the 51 days in the lower echelons of performers.

Fleet and mobility companies are the most adept at using external working capital for strategic/growth purposes. And “strategic growth corporates” are more prevalent in the marketplace sector and the Latin America/Caribbean region and use virtual credit cards and working capital loans to support strategic business needs.

Conversely, we found that the 3 in 10 firms that did not use any external working capital in the last 12 months were most likely to be found in Central Europe, the Middle East and Africa, North America and the healthcare/medical industry.

Overall, 70% of those CFOs who did not tap into any external capital said they had encountered a “lack of need” for such solutions — and they wound up pointing to a perception of working capital use as a sign of an inefficiently run business.

Per the data, marketplace firms “stood out” for using third-party revolving credit facility solutions — a trend regionally found in North America. But virtual cards are top of mind, as CFOs at marketplaces and agriculture firms plan to triple their use of virtual cards next year.