Timothy Batsche:
Hey, how’s everyone doing? Did Everyone throw the football outside? It’s pretty good. So thank you for coming. We’re gonna make this exciting. We have a Saturday Night Live skit to show as well. And you know, I figured I could start opening with a whole bunch of statistics. No, I’m, I’m kidding, like, what, what I really like to do today is to talk to you about working capital. And I think what you do is so critically important to an organization, because the product that you create working capital, without it, there is an organization. There’s no inventory, there’s no salaries, there’s, there’s no nothing, there’s no accounts payable, accounts receivable, so like, working capital is the lifeblood of an organization. And I feel a lot of the time it goes a little unnoticed, right, it’s like turning on a computer where you turn it on, and it just works. So people sort of take it for granted. So I just wanted to kind of start by just thanking each and every one of you for what you do to your respective enterprises to keep things going. And you know, to bring the story of working capital to life, I thought it’d be great to show an example here from Saturday Night Live. So I don’t know if we have any Saturday, Saturday Night Live fans. But there’s this one skit they did about cheques, and they dramatize like the writing of a paper check, versus somebody just sending a payment through Venmo. And I think in this example, let’s call Venmo, like the supply chain financing piece. So I’ll run the video and then afterwards, we’ll talk a little more.
Video (voice)
Thank you, okay, I’ll send you what I owe right now. With services like Venmo and Apple Pay. There are so many ways to send money in an instant. Just got it right now. Thanks. And while convenience is great, don’t forget there’s also cheques. Because there’s nothing like furiously scribbling on a piece of paper, tearing it, flicking your wrist and saying I trust this will suffice. Use cheques for all your payment needs, including making him leave your daughter, take this, take this and never come back. Don’t pick up her calls. She’ll be heartbroken, but it needs to be done. And hushing, Mildred, forget whatever you think you saw last night by the casino. Use cheques, but things like boy, Beatrice birthday, for taking my rings off at night. Buying poison, just one sip and I become head of board. Best of all, cheques are easy. Here what day it is here. His name here, how much here, the same button letters. And here a secret cheque is drama, a cheque is a promise. Get them in baseball, Daffy Duck won Michigan State. And make sure to add the dash after the amount. God knows how many zeros they’ll add. Cheques Available at Ridgewood Savings Bank.
Timothy Batsche
So think about the check process. So when I worked as a controller and tried to collect payments, it was always like Cheques in the mail, Cheques in the mail you’re going to get it Cheques in the mail. And you know trying to get people to pay more digitally through virtual payments a CH It was hard because people didn’t want to let go of the cheque because it gave them more time and more flow.So I view the Venmo example as like where we’re all headed, right? Like that’s the future. So that’s like, that’s a great example of supply chain financing. I feel for that person. So if you’re at dinner, and the person you’re with forgets their wallet, and then you pay the restaurant, and then the person your friend sends you a Venmo payment right away. That’s the ideal situation, right? Because the restaurant gets paid, you’re good. And then you got paid. So you have 30 days of flow with that credit card in between. So if that’s your business, like To me, that’s what winning looks like if you’re out to dinner and someone forgets their wallet like that’s awesome. Like we could do that all day long, right? So that’s the piece that I want to get to where what’s enabling more and more of that today is technology. So technology is moving at a pace that we haven’t really seen before. Right and it’s akin to this example of With a sheet of paper, does anybody know if you take a sheet of paper and fold it 50 times, How high does it go? It goes to the sun. So if you think about that, where we’re at right now is we’re at the 20th fold. So as these future folds happen, the effects are going to get more and more and more exponential. And I bet you’re seeing that today in virtual payments. So virtual payments, and I gotta warn you, every kegger growth rate I’m going to give you is going to be double digit, right? So virtual payments right now are expected to grow over the next five years by 26%.So in five years, what is around 100 million today, or sorry, 100 billion, will be over 400 billion in the next five years. So that’s the rate of growth. And when I mentioned technology, a lot of this is being done through b2b API’s, which is an application protocol, which allows basically a small business on their e RP just to go to like, like your iPhone, to go in and a plug and play and download a plug into their AARP that lets them send out virtual payments. That’s how easy it’s getting. So on your side, you’re probably seeing more of these virtual payments coming in, in the form of spam or whatever. So if you don’t have a solution on your side with that 26% year over year, it’s just gonna be a nightmare to deal with. It’s going to be like Cheques, Cheques, right? So thinking of this, the papers are folding. So all eyes are on us. So what does that mean right now? So that means McKinsey obviously did a survey, and McKinsey came out and they said, Hey, 85% of executives are going to be investing in these platforms on the buyer side and the supplier side. And also, all these executives that they surveyed, expect the future growth needs of their organization to be met through cash management, and expanding liquidity. So they’re saying that we’re not going to go out and issue more debt, we’re not going to go do this, we’re going to manage things better. And the only thing that we really have flexibility to manage is really working capital. And we’ll get more into that example. But you know, you have technology moving at this exponential rate, you have buyers adopting technology, you have suppliers also are being pressured to adopt technology and invest in it. And as the paper folds, things are gonna get more and more compounded. So now the papers are folding executives, eyes, all eyes are on you. So what do we do about it? Right? So what we do is we think about things in the terms of maybe how private equity thinks about it. So private equity kind of looks at this in ways that are a little different. So if you take KKR. So KKR doesn’t really look at earnings as much. And I’m not saying earnings and margin aren’t important. But what I am saying is, what’s more cash creation, or managing earnings,in private equity will probably say, cash creation. So they’ll look at things where if you have, let’s say, $100 coming in, you have $100 coming in, and your working capital percent is 10%. of that. So that means if you want to grow that 100 million, let’s say, by 50%, to 150, and your working capital percentage is 10%. What’s 10 million now has to be 15 million. So that’s going to increase as you grow your organization, your working capital ratio, most likely is going to grow even though we don’t want it to. But to me, if you could keep that working capital ratio at 10, and not 15, you just drove $5 million more of cash creation to your business. To me, like when I think about it, like that’s what winning looks like, in this arena, like on these platforms, and everything that you do driving more cash creation to the business to position for exponential revenue growth, because that means those executives filling out the surveys can take that $5 million that you just gave them, they could buy more inventory. Right? They could expand the sales team, they could pay a dividend, they could do whatever they want with it. But the point is it’s not tied up on the balance sheet. So you know, there’s this term in private equity that like let’s make equity sweat. Like that’s what they do. And you know, when you think about Sorry, I’m going a little over the place since these slides but you know, if you think about this debt level, right on the Fred, you can check this out. There’s $11.1 trillion of debt out there. So that’s why we have to sweat equity. And in this same quarter, interest payments grew to 465 billion. So even though rates are at an all time low, the level of debt is exponentially growing at a pace, where it’s squeezing the flexibility on the balance sheet that you have. So if you’re managing interest payments, so let’s say you look at your loan covenant, and you have to do your interest payment, at the end of every quarter, let’s say every March, then the next quarter in the next quarter, a payment in March might be more valuable than a payment in April. So that brings us to dynamic discounting. So you might want to pay a discount to get a payment in March versus in April. So if somebody is paying you for 40 days, April 10, and they could pay on March 29, you might want to give 2%, to get that payment there. That might make sense for you. But next month, it might not make sense for you to give that discount. So that’s in your control. And that’s an example of some of the technology that’s coming out that’s going to help you if you invest in it. And a lot of that stuff doesn’t show up on the income statement. So does anybody know the cost and how long it takes to process a check. So $10 is the average cost and 8.3 days, so let’s just say eight days, so it takes eight days. So more, so I will have a reference on that later. But just just keep in mind $10 to process a check in eight days. And again, you can take a vacation in that amount of time, it takes the process a check. But these things don’t actually show up on the income statement. But they show up in these working capital numbers when you want to take 15 to 10. And that brings me into like an example to bring this to life on how KKR would really look at it is let’s say you have $100 million in EBIT. Ah, and there’s three things below that line, and then you get to net cash. And let me have this out here. Let me go back to that one. Yeah. Yeah, I mean, that’s it that that cat was my life right there in the quarterfinal, you know, you’re sitting there, you’re waiting for these Cheques, and it’s just like, like dynamic discounting, let’s give an incentive out there, and let’s get paid. Let’s make these interest payments, and let’s get more net cash. So I don’t know about you, but I don’t think you want to be that cat. So just saying. So thinking about working capital and this EBIT, da example, working capital requirements in this example, to bring this to life, over the last 10 years working capital requirements have increased 53%. Some would say it could be growing faster than sales. So the way KKR would look at it, if you have $100 million of EBITda, and you take $50 million for your debt payments that are fixed. And then you take the growth you anticipate next year, you want to double the EBIT, and let’s get ambitious, you want to double the EBITDA, so you’re gonna have 30% of your working capital to support sales growth. So that’s 30 30 30 million right there. And then you have $10 million in capex that’s fixed. So you add all that up. That’s 90.
Sorry, simple example. That’s a simple example. But you add all that up, that’s 10 million in net cash creation. So let’s say you can take that working capital percentage from 30% to 20%. You just doubled the cash creation of your business and the good news is working capital is the only one of these that’s really flexible. Your debt payments are fixed Unless you refinance it and lower the rate, cap x is fixed. So you’re working capital and that’s where all these surveys and all the data is pointing. And that’s why dynamic discounting within supply chain financing is forecasted to grow over 30% in the next five years, so think about how you could use that tool because KKR incorporates all its portfolio companies to invest in these platforms because they want to manage the debt load. So think about what all this means for your organization’s rights. And you know, the effect to where actually you know a member of my team who’s sitting right over there and I were actually out with a member of the Treasury team the other night at a Yankees game which is like one of the first meetings we’ve went to in like the last two years which is pretty fun. But you know, the treasurer there was telling me, you know, I had a similar conversation with that gentleman, and he was telling me, he was like, well, Tim, we finance Our receivables through our payables. So we’re able to push our payables out and basically fund our buyers receivables through balancing that. And you know, I hear what you’re saying here and I agree with it. But that’s how we kind of do working capital. And we actually invested in a lot of these platforms with dynamic discounting, because we want to pull things forward at certain months, because we have bigger commitments. And then we want to incorporate more cash, because maybe HQ wants to do a dividend back to the family owners of the business. So there’s a lot of dynamic discounting where it’s up to you to turn it on and off, right. So I love that example, because it puts you in the driver’s seat. So going back to that $10.08 days for an invoice, right, so if you think about that, and everything that we talked about, you could take a trip to Hawaii, and stay at the White Lotus, and have a Daiquiri for $10, in the time it takes to process one of these invoices. So so my thing is, is, when you’re thinking about costs of these technologies of an investment, the cost of giving a discount, I bet most organizations that that I’ve talked to and think about this, too, is most of these discounts are always fixed, they’re always given out so so every one of the wholesalers that that my team works with, if they give a discount, it’s usually 2%. And it’s usually 10. So that means if somebody is paying by the 10th day of the following month, they’re getting a 2% discount. And we start asking questions around that, in the amount of debate that goes on between the buyers that Yeah, I paid this, I paid that. And the buyer just takes 2% off and just and just sends the payment in. And sometimes there’s disputes over things like we didn’t get it on time. And that causes a delay in cash reconciliation. And until cash has reconciled, it’s hard to deploy. So like the pain points here, where it’s really getting digitized, and it’s really going in this technology direction. So say if it’s your offering that 2% discount this month, you know when it comes in, because you can pull it and you control it. And that’s where these platforms are going. So with that, you know, I hope you can all get to Hawaii and get to the White Lotus, and have a Daiquiri and kind of think about all this. But we’d love to pause here and open it up to any any questions reactions
Questioner 1
In the SNL skit, you said the perfect world is the transaction of Venmo. But what if you created, you quoted a 30 day float on the credit card, you’re not including the interest on that float, boo, or the 3% surcharge?
Timothy Batsche
Oh, that’s a good one. I bet your business surcharge.
Questioner 1
We call it a convenience fee. Okay, pass on to the client that wants to pay via credit card. So no, we
Timothy Batsche
don’t really charge. Got it. So tell us about how your business comes to that convenience fee? Like how, like not putting you on the spot? Totally. But we’d love to hear more about how did your team decide that that that was the right right direction ago
Questioner 1
for clients to pay via credit card if they wanted to. without creating a way for them to or across the board. Mandatory because there are some clients that want to Don’t lie to the 3% convenience fee, paying via credit card for their own reasons. or whatever it is. So we want to create a pathway to do that. And still maintain the other payment methods that we have got. Obviously increases the cash flow. Yeah, yeah. The processor gives us the payment within 48 hours. Yeah.
Timothy Batsche
Did you have a Daiquiri before you made that decision? No. But you know, that’s interesting. Do you have the convenience fee if they’re paying at point of sale, like if they’re non term, so if they’re saying, Hey, I don’t need the terms, I’m just going to pay you with a credit card for these goods. I don’t I don’t need a float. I’m just gonna. Is there a convenience fee at that point? Well, if they’re not, you’re not extending credit to them.
Audience Member
So yeah, if they kch we don’t charge them for that. Or if they pay by now, pay later. We don’t charge them interest for payments broken up over a certain time.
Timothy Batsche
Interesting. No, thanks for sharing.
Audience Member
Any additional questions? I have a question. Yeah, sure. So what do you think? Is the preferred payment mix for treasurer’s? The preferred? Yeah? And if How can they transfer from cheques to E payment? What is the best route to do so?
Timothy Batsche
So in, in my conversations, I’ve seen, like a, like a, like a handoff process that goes on where a lot of times, a lot of the organizations we deal with are very decentralized. So the field teams get to make that decision. So if you have a West Coast to Central and an East Coast, the West Coast might want to make that jump, but the East Coast might not. So let’s talk about the West Coast area. So let’s say they want to do it. Usually I’ve seen around 40 to 50% of receivables or cheques, is that a fair number? Does that convenience, convenience fee? Is that fair? How much percent of yours is his check? Would you say 30% 30? Okay.
Audience Member
30% of the pay by cheques?
Timothy Batsche
Okay, well, that has gone down a little bit, and that’s good. But I will say there’s usually an outreach program, where it’s either the sales team has a conversation with the customer, or there’s more like an electronic way, an email way that sort of invites them to offer to pay. And there’s like different electronic ways. So you could pay a CH, you could pay a wire, or you could pay via a convenience fee through these options. Or sometimes there’s no convenience fee. But one thing I have seen is, the more levered a company is, the more they’re willing to not do a convenience fee, because they value predictivity on the cash flow above all else. So if you’re going to do a convenience fee, it might shift people into Cheques. So that 30% number might increase. And they don’t want that because they have to make those interest payments. So now you have companies that are leveraged to EBIT and four or five times I dealt with those companies, they don’t want to encourage any open way they just want to get paid. Right? So I think it matters on leverage. And it matters on how decentralized the organization is.
Audience Member
Thank you for another question over here.
Audience Member
So our company is called RevZilla. Basically, we do Motorsports in the auto parts. So some retail stores, we also ecommerce, but we do a lot of Cheques because the customers get rebates. So in that case, we’re getting a lot of Cheques. What do you suggest as a way to reduce Cheques, we don’t have customers in a banking account information.
Timothy Batsche
So I think with Cheques, one, one of the examples too, that I didn’t touch on as deeply, but I’ll talk about it is that sometimes Cheques work. So I think that the pain point I’m hearing from you is you’re getting a lot of Cheques, and you’re manually working through the rights. Oh, you send Cheques.
Audience Member
Maybe only have that customer information, right.
Timothy Batsche
So yeah, I think the gentleman behind you could probably talk about that a little bit. But I think there’s certain scanning technologies that can do with Cheques where you can just automate how they’re sent. So you don’t have to like to go and hand write them when you send it.
Audience Member
propose a fix for this company. Obviously, the school in the last 18 months of barbed wire actually has physical Cheques with almost every company for three days.
Timothy Batsche
Got it. 111 of the biggest B2B investments right now in working capital is scanning technologies to do exactly what you just said. So I know the lockbox technologies like sort of incoming Cheques, but if you want to automate how they go out, you can set up where you want to send them and just press a button and the Cheques are automatically done and that’s through like these scanning technologies. We could talk more about it, but that’s the biggest piece where a lot of investments are going exactly what you just said. Yes. Yep. Yeah, actually, it’s interesting. You mentioned that as I know JP Morgan And actually has a plugin for that like on their Treasury services. I forgot the name of the plugin, but it works right with Oracle and it does exactly sort of like what you’re looking for. Yeah.
Audience Member
All right. All right. Thank you so much.
