The Treasury and Working Capital Survival Guide

The world has changed rapidly in the last 30 days.  The US economy went from setting a record for the length of the expansion to setting a record for the fastest recession in the history of the United States.  Navigating through this gut-wrenching reversal requires decisive management action, focus, and speed.  A critical component of this process is successfully managing working capital.  Management teams must evaluate working capital needs and utilize working capital as a key resource to sustain ongoing business activities.

These needs should be adjusted dynamically to ensure stability and continuity during the downcycle and to fuel sustainable growth and value creation during the eventual upcycle.  The first and most important step in this undertaking is to accurately assess the company’s cash forecast and liquidity demands under a new realistically revised sales forecast. From this starting point, companies must access their most important critical needs to keep operations running as smoothly as possible. 

Common questions that should be asked include the following:

Do we need cash?

When there is a shift in the business cycle, companies learn the hard way that liquidity and credit can be a fair-weather friend - it is always plentiful and available when you don’t need it, but in true times of need, it disappears.  With the credit markets currently in severe dislocation, a looming credit freeze may be imminent (charts 1 & 2).  For fortunate companies with existing credit capacity, debt covenants should be carefully reviewed before drawing funds as a source of cash. Regardless of credit availability, companies should look to unlock cash and improve liquidity through working capital.  Companies can reduce their cash cycle conversion time by reducing accounts receivable and inventory and extending accounts payables.  This process will help companies self-fund and quickly generate precious cash to pay for obligations. 

Managing the Cash Conversion Cycle to optimize Working Capital

DSO + DIO – DPO = CCC

Is our supply chain safe?    

Use dynamic discounting or supply chain financing to alleviate critical supplier cashflow woes. Today, companies and their supply chains are more inextricably linked than ever before.  Companies may find their vulnerabilities are not from their own balance sheet, but rather from the balance sheet of their suppliers.  During the Great Financial Crisis, a 2009 Business Continuity Institute survey found that 28% of companies had suffered a disruption due to financial failure of a supplier in the preceding year.   For the week ending March 8, Tradeshift, a leader in supply chain payments, announced a 62% y/y decline in business transactions.  This slowdown in trade will lead to a liquidity crunch for the global supply chain. If your company is in good financial condition and / or has access to capital, but you are concerned about the liquidity of your suppliers, a win-win could be dynamic discounting or supply chain financing.  By paying your suppliers faster for a discount, you can strengthen the financial supply chain while earning a return that yields multiples of your own cost of capital.  You may also want to consider a funding partner to underwrite a supply chain financing program on your behalf.  In practice, the funding partner will purchase selected accounts receivable from your suppliers at a discount allowing your company an extension to pay at a later date.  This reverse factoring supports your supply chain by offering your suppliers more favorable payment terms without extending your own cash conversion.  If your company has a strong balance sheet, this arrangement will be a cheaper form of financing for your suppliers than a traditional factoring relationship.

Are we maximizing the value of our purchasing spend to reduce costs?

Procurement cards are credit cards used to make purchases on behalf of the company.  The company is responsible for the obligation to pay and codes can be embedded within the program to restrict purchases to eligible product categories.  P-Cards offer several efficiency benefits for the company and the implementation of p-card programs along with supplier enablement are easy.  For large companies, the cash back rebates can be substantial yielding a greater than 1.5% return of total card-related spend. Additionally, working capital can be freed up from card statement payment extensions by up to 28 days. Lastly, paperwork and other documentation can be eliminated while spend activity can be posted automatically to the general ledger to enhance productivity.

Are we prepared for foreign exchange fireworks?

The impact caused by the coronavirus has created a spectacular rally in the U.S dollar.  Supply chain disruption and sales collapse has created a dollar shortage, and a challenge to maintaining adequate levels of working capital for both Buyers and Suppliers.  Currently, over $9 trillion of the world’s private sector debt liabilities are in U.S. dollars.  As the dollar has increased in value, so too has the value of these liabilities in local currencies.  The resulting exchange rate volatility can have a substantial impact on cashflow and earnings.  By utilizing an integrated treasury solution, practitioners can accurately gauge FX exposures and perform careful analysis of hedging strategies to minimize the reported volatility on the P&L.

Do we have an integrated solution?

An integrated treasury management solution is an important tool to help manage cash, liquidity, and risk. It allows practitioners to have more insight into current cash positions through real-time bank connectivity.  Treasury management systems give practitioners the ability to make more accurate cash forecasts for executing planning decisions and liquidity strategies.  A centralized cloud-based treasury solution will also prove invaluable at a time when employees may be working remotely.  In an environment where all elements of a company’s underlying operations and finances are changing rapidly, real-time data monitoring is critical.

How do we execute this coordinated approach?

Few organizations have a functional position for “Working Capital Manager.”   As a result, working capital improvement programs typically default to the CFO or Treasurer.  Working capital programs can be difficult to execute since it requires the cooperation of many different departments. Nitor recommends creating a Working Capital Steering Committee to bring together the key stakeholders responsible for liquidity to compliment your organization’s existing Capital Committee.  By benchmarking your working capital metrics versus industry peers, you can identify opportunities and frame realistic goals for all the stakeholders in this program.  If possible, it would also help to analyze the historic data of your company and peers during the 2008 and 2009 downturn to stress test your forecasts and evaluate your working capital needs and goals.

Nitor is an advisory and consulting firm founded in 2003.  We focus on driving value in Source-to Pay/procurement, treasury and working capital optimization, technology strategy selection and implementation, and change management across all industries. Nitor has had the privilege of consulting with Fortune 500 companies as well as providing solutions for government entities like the State of Maryland and the Government of Canada.

https://www.napcp.org/news/494574/Supply-Chains-Face-Liquidity-Crunch-as-Tradeshift-Reports-62-Drop-in-Global-Trade-Transactions.htm