Case Study: A 30.4% DPO boost in 90 days
How did the Quartix solution aid a company in obtaining a significant bottom line boost? Here is a detailed story of one of our clients!
About a year and a half ago, a US manufacturer approached us with a challenge. Its cash conversion cycle (CCC) was quite slow (# of days), therefore, the company's working capital investment was outstripping capital required to support its growth targets.
It took the client 67 days on average to collect from its customers (DSO), while it paid its vendors in 32 days on average (DPO). This imbalance hurt its operational flexibility, and forced it to obtain external debt to finance its working capital. Something had to be done.
The client’s ability to improve the situation significantly from the AR side (collecting quicker from its customers, or using an AR factoring facility) was either limited or too expensive. A 'cleaner' solution which would not cost the company in the form of incremental interest expense or related capital charges was sought. It decided to solve the situation from the other end - paying vendors later and improving its DPO. It asked Quartix to assist.
To comply with confidentiality obligations, we’ve changed the financial figures. The impact on the client's financials is unchanged.
In a nutshell, within 3 months, Quartix assisted this new client in adding 9.4 days to its DPO, boosting its AP by $10.7M (both are 30.7% improvements).
The client obtained the cash needed to support its growth, using the excess generated cash to reduce its debt levels. Here is how it unfolded.
The Client Profile
• Annual sales volume: $550M
• Annual procurement volume:$398M
• DSO (days sales outstanding): 67 days
• DPO (days payables outstanding): 32 days
• Accounts Payable: $35.3M
Goals: Increase DPO by 25%
Our new client had a very clear idea of the required result: Increasing DPO by 25% would generate enough free cash flow to support the expected growth, optimize CCC and reduce enough debt from its BS to comply with bank covenants.
Following an analysis of its procurement data, the client identified 10 vendors that aggregated an amount representing over 20% of its overall annual spend. It intended to negotiate longer payment terms with them, and asked Quartix to provide these vendors with optional early payment, to reduce / eliminate vendor friction.
3 months into the program: >20% coverage of the client spend
The client introduced the 10 vendors to Quartix. Over the course of only 3 months, 9 vendors decided to join the program. The on-boarding of the vendors was done by Quartix, following introductions by our client. No active involvement in the on-boarding process was required from our client, apart from making those initial introductions.
These 9 vendors represent over $94.7M of the client's annual procurement volume, accounting for 23.8% of its annual spend (based on previous year’s figures). Here’s how the spend coverage grew during the first 12 weeks of the program:
Terms extension: 30 to 60 days increase for participating vendors
With Quartix providing optional, affordable early payments for the vendors, the client was able to negotiate and extend payment terms with these 9 vendors, as follows:
• 7 vendors (aggregate procurement volume = $61.7M): terms extended 30 days --> 60 days
• 2 vendors (aggregate procurement volume = $33M): terms extended 30 days --> 90 days
Discussion around these terms were conducted by the client, in parallel with the Quartix program introduction.
Over 30% increase in DPO and AP
Let’s first review the impact of a single vendor on our client’s AP. One of the vendors is responsible for 5.3M worth of annual spend. Prior to Quartix, its terms were 28 days, translated to AP volume of $0.41M. With Quartix, the client extended payment terms to 60 days (32 days added), making the total $0.88M - a $0.47M AP increase.
3 months into the program, the client increased its DPO from 31.9 days to 41.6 days, and its Accounts Payable moved from $35.3M to $46.0M.
Cost / Benefit analysis
Quartix assisted the client in exceeding its goals in less than three months, at no cost to the client, while unlocking its vendors to a new, affordable and flexible early payment channel.
The program summary is presented below, using a simple cost / benefit analysis:
- DPO is up 9.7 days (30.4%), reducing it cash conversion cycle by 9.7 days as a result.
- AP is up $10.7M (30.4% as well), translated to a similar amount of cash instantly freed up.
- Cash needed to support client’s growth targets was obtained.
- The remainder was used to reduce the company’s debt level.
- No out of pocket costs
- No ERP integration during the initial launch (data exchange was done via digital files).
On-going costs / friction:
- No on-going costs / fees.
- No added leverage / debt to the client BS
- No added collateral
Quartix provided "unsecured" trade cycle capital to the client, by offering a new, optional early payment channel to its selected vendors, allowing the clients ('buyers') to extend payment terms at greater ease.
The result is a long term, impactful and frictionless 'quick fix' for the client - applied easily, resulting in a permanent, impactful reduction in cash outflow / working capital stress, All accomplished without the need to enter into multi-year commitments and related commitment fees