Visa: Speedier Cash Conversion Cycles Make Dollars and Sense for Growth Corporates

 The companies with top lines of $50 million to as much as $1 billion populate all manner of industries all across the globe.

But as far-flung as they might be, there’s a commonality that runs through it all:

They could benefit — financially, to be sure — from better working capital management and quicker cash conversion cycles (CCC).

That latter metric is broadly defined as the number of days it takes a firm to “convert” the cash it spends on inventory into the cash that wends its way back into the corporate coffers after selling those products. The logic follows that a shorter timeframe between cash in and cash out winds up giving better visibility into just how much money is on hand to keep funding the normal, strategic activities of day-to-day business management and to have as “dry powder” to deal with unplanned expenses.

More than 870 CFOs and treasurers across five industry segments, five global regions and 23 countries gave insight in the “2023-2024 Growth Corporates Working Capital Index” into the challenges they face as they navigate rough macro seas and as they must examine how they access and manage cash.

The data show that 32% percent of Growth Corporate CFOs used external working capital solutions for strategic growth purposes — a range of processes that cover everything from funding the business and expanding it, buying inventory and dealing with efforts to modernize back office tech and workflows. Another 34% used those working capital solutions to cover expected cyclical shortfalls and manage seasonal gaps.

How Much They Saved

With a bit more granular insight, the most efficient Growth Corporates — as measured by a higher propensity to see DPO reductions in the coming year have annual sales between $50 million and $250 million and, in terms of operational focus, are concentrated in the LAC region and utilize virtual credit cards and working capital loans, to support strategic movements. Reduction to DPO is chosen as a measure of improved operational efficiency due to its connection to a firm’s ability to pay suppliers and settle its debts, which is directly impacted by access to capital — an ability enabled or facilitated by access to external financing.

The Growth Corporates scoring at the highest percentile have an average days payable outstanding (DPO) of 46 days, while performers in the middle and the bottom of the range report about 50 to 51 days in DPO.

This year’s analysis found that even a moderate lessening of DPO can have a significant impact to operating margins. By lowering DPO by five days, firms can save $3.3 million in accounts payable (AP) costs.

In terms of CCC, the best-performing firms have cycles that are 14 days shorter than their peers and also have nine fewer days in inventory outstanding. The more efficient the inventory turnover, the better sales are because less inventory is sitting on the proverbial shelves, will not “age” out of its usefulness and the healthier the firm can become.

There’s increased recognition of the benefits of tapping outside working capital solutions — a strategy embraced by two-thirds of Growth Corporate CFOs. As noted in the report, 7 in 10 CFOs who used external working capital said they’d seen improved business metrics due to using those solutions, marked by better inventory management and higher growth rates.