Challenge for Treasury: Cash Flow Optimization in medmix's Year-End Closing
For treasury managers, the annual financial statements mean juggling a wide variety of stakeholders and demands. Cash flow is a particularly important lever in the management of key performance indicators. Ralf Kesten, Executive Director Head of Multinationals & Partner Management at cflox, uses the example of the cflox client medmix to explain how more flexible payment terms allow for greater leeway both internally and externally.
Once again, the annual financial statements are just around the corner, leaving CFOs and treasurers with a lot of work to do: Various stakeholders now need to be served – shareholders, for example, are interested in business performance or share price developments. They want to know what the outlook is for the coming year and whether the company has delivered on its promises for the current year.
Banks, on the other hand, see a company as their customer and evaluate the long-term relationship differently: they therefore generally look not only at individual balance sheet figures such as sales or net debt, but also consider the company's overall balance sheet as well as its business situation and development.
In addition to shareholders and banks as external stakeholders, there is also internal pressure on the treasury: Key figures such as cash flow and working capital must be managed and optimized, while at the same time other departments – such as purchasing – come up with new requirements and issues. Reconciling and optimizing all of this can be a challenge.
What matters in cash flow management
In this environment, cash flow management is an important issue for treasurers. But how do the responsible employees know if and when they need to take action? And what measures and resources can they use to manage cash flow?
Or as the company medmix put it: “For us, the first important step was to recognize the need for cash flow management and then identify where this need came from.” In this case, the need for control stemmed from the company's own supply chains, which required it to build up inventories. In addition, further production capacities had been built up in anticipation of expected growth – all of which tied up a lot of capital. The treasury team therefore needed to take urgent action.
A good way to free up cash flow is traditionally through supply chain finance measures. However, the usual approach here, i.e., agreeing on extended payment terms with individual suppliers, was out of the question in this case, as the company found itself in a comparatively weak negotiating position vis-à-vis its suppliers.
Small measures with a big impact
Alexander Sika, Head of Group Treasury at medmix, therefore asked himself: “What options do we actually have for working capital financing?” The company's main bank was able to provide valuable support here, putting the company in touch with cflox. By using a flexible working capital solution, they can now take advantage of additional payment terms without involving their suppliers. To successfully optimize their own key figures, this does not even have to be applied to all suppliers.
"We only use financing for a few of the smaller suppliers, and by slightly extending some payment terms, we can push these back by a few days as a key figure in the overall average. That's enough to improve our balance sheet figures such as the cash ratio or days payment outstanding."Alexander Sika, medmix
Auditors on board
In this context, it was important for the treasury department to get the auditors on board from the outset. We discussed with them in detail what we specifically planned to do with our working capital optimization tool, the volume of these measures, and their impact on the DPO.
As the analysis with the auditors showed, these working capital financing measures must be disclosed. However, the effort involved here remains low for our client: "Since the change in payment terms only affects a relatively small portion of liabilities and has only a minor impact on the books, we only have to disclose that we are using such a tool – but not disclose in detail the exact extent and what this does to our balance sheet," says Alexander Sika.
More flexible payment terms can also improve supplier relationships
The ability to extend payment terms without having to enter into individual agreements with each supplier has several positive effects for the company's treasury. On the one hand, even when implemented with just a few smaller suppliers, this creates noticeably more flexibility in managing cash flow and working capital. On the other hand, medmix has found that these measures also have a positive effect on long-term relationships with its own suppliers.
"By flexibly managing our payment terms, we ensure that we always pay our suppliers on time without immediately impacting our own cash flow. This shows our suppliers that we are a reliable partner and allows us to enter into discussions about possible extensions of payment terms in the medium and long term."Alexander Sika, medmix
This opens up new options for treasury managers such as those at medmix—both in terms of managing their own key figures and in their relationships with external stakeholders.