Facilitating Growth Through Efficient Working Capital

by Sebastian Vestergaard, CFO, Joe & the Juice with Paula da Silva, Head of Transaction Services, SEB

Treasurers and CFOs are well aware that managing working capital is essential to the financial health of a business, but it is often difficult to know where to start, and where the greatest value can be added. Furthermore, responsibilities for working capital are often distributed across different departments. As a result, it often seems easier and less disruptive to maintain existing processes and responsibilities and use bank facilities as a source of liquidity instead. As the regulatory environment evolves, corporate awareness of liquidity risk increases, and margins continue to be pressed, however, companies of all sizes need to identify and tap into internal sources of liquidity.

One company that has been particularly successful in optimising working capital is Danish-headquartered corporation Joe & the Juice. Joe & the Juice has established a strong and growing reputation for premium quality coffee, juices and food through stores in 11 countries. As Sebastian Vestergaard, CFO of Joe & the Juice, explains in this feature, a key element of corporate strategy has been to enhance its working capital fundamentals whilst strengthening the physical and financial supply chain. Paula da Silva, Head of Transaction Services, then provides the bank perspective.

Sebastian Vestergaard, CFO, Joe & the Juice

Joe & the Juice is growing at an enormous rate, with new stores opening across Europe and now Asia and the United States. While this is an exciting time in the company’s development, managing working capital effectively is critical to our success. Given that we receive payment from customers at the point of purchase, we are fortunate in that the mismatch between payables and receivables is in our favour. Even then, however, we sell loyalty cards to customers as a way of accelerating receivables: by purchasing a loyalty card, customers benefit from a discount, while we enhance our working capital position and lock in a profit margin.

The value of strategic partnerships

With limited opportunities to enhance receivables, the primary areas in which we can enhance working capital are payables and inventory. From a payables perspective, a key element of our business model is to work with a very small number of major suppliers who are strategic partners to our business. For example, we have only two or three food suppliers in Europe as well as key warehouse suppliers for certain fruits, such as apples, with one logistics partner globally. By concentrating our business with only a few strategic suppliers, these companies are partners in our success and share our growth journey. As a result, we are able to negotiate preferential payment terms, currently 90 days, with room for constant optimisation.

Joe & the Juice is growing at an enormous rate, with new stores opening across Europe and now Asia and the United States.

We adopt a similar approach with our construction partner. We have structured our arrangement so we pay 20% of store construction costs upfront, with two years’ credit. This approach has been pivotal to our success in that we can build four or five stores for the cost of one, and pay the balance once each store is established and profitable.

These partnerships are key to our success both in ensuring the quality and consistency of our products, but also in managing our working capital effectively. It would be far more difficult both to guarantee quality, and negotiate such attractive payment terms, without these suppliers being able to share our success by offering substantial growth in future business.

A crucial banking relationship

It is only after we had done everything we could to optimise our working capital internally that we approached our bank, SEB, to help finance the next step in our growth strategy, particularly in Asia and North America. Every day that we delay our store opening programme in these markets, where the demand is enormous, we lose income and open the door to competitors. SEB is an essential partner in facilitating this growth. Firstly, the bank provides us with a credit facility that supports both incremental store opening, but also acquisitions, which is a quicker way of ramping up our activities in these regions. Secondly, we are looking at alternative models for store premises, such as leasing, so that stores become liquid assets rather than fixed, depreciating assets.

The value of digitisation

The other means by which we maintain a firm handle on working capital is through inventory management. Around eight years ago, we built our own ERP system that has subsequently been rolled out to every Joe & the Juice store. We designed the system with functionality and capacity that far exceeded our needs at that time. As a result, we have successfully scaled up our activities within the same system environment, achieving consistent processes and reporting for stock management, sales and projections, and allowing rapid rollout of new stores. We also have a centralised view of information across our business which is critical both for day-to-day cash flow, stock management and accurate budgeting.[[[PAGE]]]

A partner for growth

SEB is a key partner for Joe & the Juice, fulfilling a fundamental role in our growth strategy by financing our growth outside our home markets, and sharing their expertise and experience in operating internationally. By having access to a single online banking platform globally, we have full visibility over our cash position, and the ability to define consistent processes and analyse cash flow systematically to support cash management at both an operational and strategic level. What has been clear to us, however, is the importance of optimising our working capital internally before seeking external financing. By doing so, we have greater control over our financial assets, our costs are reduced and the bank has greater confidence in our cash flow fundamentals, therefore deepening our relationship further.

Paula da Silva, Head of Working Capital Management,Transaction Banking, SEB

Joe & the Juice is exemplary in the huge strides it has taken towards optimising working capital, with demonstrable success that has led to accelerated growth. Sebastian and his team have been at the forefront of industry best practice by identifying and exploiting working capital and liquidity opportunities within the business as a complement, and indeed a precursor to seeking bilateral financing from banking partners. This is an approach we would warmly recommend to our customers, and Joe & the Juice’s amazing growth story bears witness to its success.

Changing perceptions of supply chain financing

Every company has different cash flow dynamics which in turn create distinct working capital challenges and opportunities. For example, while Joe & the Juice have a B2C model with payment at the point of sale, companies that offer credit terms, particularly those operating on a B2B basis, often have the opportunity to monetise receivables through receivables financing. This technique is also known as factoring, and has traditionally been used by smaller companies or those in financial distress. This is no longer the case, and receivables financing, and other forms of supply chain financing are now widely used by companies of all sizes and industries to optimise working capital.

Evolving relationships

Just as working capital optimisation and alternative forms of financing are now growing in importance, so too are corporate relationships with banking partners. Banks are increasingly obliged by regulators to understand their customers’ commercial flows in depth, in order to monitor the end use of goods and services by the ultimate counterparty. This is challenging for a variety of reasons, not least as banks need to balance their compliance obligations with customer demands for efficient, rapid straight-through processing. Digitisation is key to achieving this balance, with rule-based compliance checking integrated with automated transaction management and two-way information flows with customers on the status of payments.

New approaches to delivering value

Banks’ investments in technology and processes to comply with regulatory demands also bring associated benefits to customers. In particular, we are able to tap into a huge amount of intelligence about customers’ payment and collection trends. This enables us to provide customers with analysis and cash flow forecasting based on historic data, and identify opportunities to monetise financial flows. We are also able to leverage our experience of automating end-to-end transactions to help customers identify inefficiencies in their transaction cycle and facilitate a more comprehensive working capital approach.

Breaking down silos

As a relatively young business with working capital optimisation at its heart, Joe & the Juice has been extremely effective in integrating the physical and financial supply chains, but many organisations – both banks and corporations - that have developed their operations over a longer period find this more difficult. Banks have traditionally been organised in relatively discrete silos, such as cash management, trade finance, supply chain finance etc. and it takes time and often a cultural shift to break down these silos. Similarly, corporate treasury departments often work quite separately from sales, purchasing, accounts payable and receivable, and other departments that participate in the working capital cycle. At SEB, we took an early lead in integrating our business functions to enable a more cohesive approach to working capital, which is reflected in both our customer advisory services and solution offerings, such as integrating e-invoicing and direct debits with supply chain financing.

Business in the ‘new normal’

As the extended period of market volatility continues and financing conditions remain challenging, particularly given the changing regulatory environment, managing working capital and liquidity risk will remain top of mind for treasurers and CFOs. Companies need to look first at internal sources of financing and leverage the value of commercial flows before considering bilateral bank financing. Banks play an essential role in helping to identify, realise and automate financing and working capital opportunities, as well as providing credit facilities. In addition, by becoming more deeply entrenched in the financial supply chain, banks move from transactional partners to strategic partners to facilitate success.