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.