April 2016 | Sponsored | Thought Leaders

Freight Audit and Payment: An Untapped Source of Working Capital

Tags: Freight Payment Services, Logistics, Supply Chain

Rick Erickson is Global Director of Freight Payment Solutions, U.S. Bank, 866-274-5898

Q: You said recently, "The art of working capital management has declined." Why isn't it a focus?

A: The no- to low-interest-rate environment following the 2008 market crash made it easy. Debt wasn't as big of a concern, so many companies let their attention to working capital management slip. Now that the Federal Reserve has started to raise rates and the economy is improving, companies are feeling increased pressure to unlock working capital and keep their cost-to-serve down—two essential elements of building a competitive global supply chain.

Q: Why is working capital management so important?

A: Margins are tight for shippers and carriers. In a time when two-day and even same-day shipping is common, consumers expect products to arrive quickly. As any logistics professional knows, speed-to-market impacts overall costs. And it's not just freight costs that put pressure on companies; they also need to have increased inventory. To compete in this fast-paced economy, companies must look for every efficiency possible within their supply chain. They can then use that preserved cash to reinvest in their business.

Q: What steps have shippers traditionally taken?

A: Some shippers put pressure on their carriers to extend payment terms. While this helps shippers meet their working capital goals, it puts them at odds with carriers. In addition to their own working capital goals, carriers are under enormous pressures with increased regulations, driver shortages, and ever-increasing demand. Shippers are realizing that meeting customers' demands requires solid relationships with their carriers. So it's clear that the shippers who treat their carriers well will have an advantage.

Q: How can both shippers and carriers improve working capital?

A: With freight spend 3%-12% for most product-based companies, leveraging this spend to improve working capital through trade finance is a win-win. A freight payment solution with trade finance allows shippers to hold on to their cash beyond the typical 30-day payment terms. Meanwhile, carriers get paid upon invoice approval. Both sides of the partnership can maintain their highest levels of efficiency without carrying a burden for each other. Trade finance enables companies to easily accelerate cash flow by increasing working capital from 30 up to 90 days without impacting balance sheets.

Q: What examples have you seen of shippers excelling with working capital?

A: A global food and beverage company leveraged supply chain finance strategies for several years to extend terms to suppliers but excluded transportation providers due to their strict 30-day terms and concerns about capacity. By leveraging trade finance through U.S. Bank Freight Payment, this industry leader increased working capital to 75 days and gave more favorable terms to carriers, including payments within four days of invoice approval.

If a company with $100 million in annual freight costs had access to that money for 90 days instead of 30, it would see a working capital benefit of more than $1 million, assuming a weighted average cost of capital (WACC) of 10%. Regardless of interest rates, increasing your working capital can greatly impact your bottom line.






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